Rosalind Evans
The U.S. economy stands stronger than during the Great Recession. However, sustained inflation and last year’s steep decline in the stock market have unnerved American workers and retirees, casting shadows over their retirement hopes in a manner reminiscent of 2008.
The 2023 Retirement Confidence Survey, in its 33rd year, has unveiled this sentiment. Spearheaded by the Employee Benefit Research Institute (EBRI) and Greenwald Research, this survey stands as the most enduring of its kind, capturing the confidence levels of workers and retirees.
Fielded in January, the survey was a reaction to a worrying 19.4% slump in the S&P 500 (.SPX) in 2022. While equity markets have since bounced back and inflation has eased, it still hovers higher than what policymakers find comfortable.
Annually, EBRI investigates the sentiments of workers and retirees on retirement themes. This year, a dip was noted: 64% of workers expressed confidence in their post-retirement life quality, a drop from 73% in 2022. Retirees displayed a slide from 77% to 73% in confidence. Such a stark dip was last noted in 2008 during the global financial meltdown.
Compounding the worries, 84% of workers and 67% of retirees fear that surging living costs will dent savings. A vast majority, nearly 90% of workers, fret that inflation might remain elevated for another year. 80% apprehensively eye the possibility of a looming recession and subsequent hikes in interest rates.
Debt is another dark cloud. 60% of workers affirm that debt is troubling them, with the majority indicating high-interest credit card debt as the culprit. Medical expenses and student loans also made the list.
Craig Copeland from EBRI notes, “This marks the first notable dip in confidence post-pandemic and is the most significant since the Great Recession.”
Diving Deep into Retirees and Inflation:
Stock market oscillations predominantly influence those on the brink of retirement or already retired who have substantial market stakes. However, this encompasses only about 40% of U.S. households as per Federal Reserve data.
Inflation is a universal concern, continually lurking in retirement strategies, even if it isn’t in the spotlight. For instance, at a 2% inflation rate, $100 today would equal $164 in purchasing power after a quarter of a century.
However, the effects of inflation on retirees are multifaceted. A significant number of retirees rely on Social Security, which has built-in inflation safeguards. This safeguard, the annual cost-of-living adjustment (COLA), was set at an impressive 8.7% this year, marking the largest in 40 years.
However, protection levels differ, as Social Security’s impact varies with income levels. For instance, last year, it replaced about 54.8% of the income for those with average earnings of $27,011, in contrast to 26.7% for those earning around $147,775.
Expenditure patterns in retirement are not static. While younger retirees might splurge on leisure and dining, older retirees grapple with escalating healthcare costs. Further, the looming risk of long-term care expenses can’t be ignored. For the 75 and older group, housing emerges as the chief expenditure. Thankfully, owning a home shields retirees partially from inflation, barring expenses like property taxes and utilities.
Should retirees recalibrate their plans expecting more inflation? Not necessarily. J.P. Morgan Asset Management’s research reveals that from 1982 to 2022, inflation averaged 2.9%. Hence, an assumption of 2-3% seems apt. To be on the safe side, individuals can always consider higher estimates, though aligning those figures can be challenging.
In an ever-changing economic landscape, American workers and retirees are faced with an intricate puzzle of balancing their aspirations with realities like inflation and market volatility. As the 2023 Retirement Confidence Survey illustrates, sentiments and confidence levels can oscillate with the ebb and flow of global events. The key for individuals navigating their retirement paths is to stay informed, remain adaptable, and maintain a diversified approach to financial planning. This will not only help in weathering unforeseen storms but also in shaping a retirement that mirrors their dreams.
