How to manage your pension as inflation rises

As inflation soars to record highs, retirement savings are feeling the pinch, making it all the more important to make sure yours is working for you.

US inflation rose 8.5% annually in March, hitting a new 40-year high as the war in Ukraine pushed up energy costs, the latest CPI showed on Tuesday. This was followed by a rise in the producer price index on Wednesday, which rose 11.2% year-on-year to a 12-year high.

British consumer prices rose to a 30-year high in March and are up 7% for the year, the Office for National Statistics reported on Wednesday.

The latest data reinforces an already bleak inflation picture, with prices outpacing wage growth in many advanced economies.

That can have a major impact on pensions, as savers and retirees try to maintain their purchasing power amid the worst cost-of-living crisis in decades, and pension funds work harder to keep up with inflation.

“The skyrocketing rate of inflation that we’ve seen for the past year will devastate both pensioners and the pension fund itself,” Dan North, senior economist at Allianz Trade North America, told CNBC.

Among those hardest hit by rising inflation are retirees themselves, especially those on lower or fixed incomes whose money needs to keep flowing to pay for non-discretionary things like groceries and energy.

“Where it will hurt people more is those who are retired and don’t have a set pension,” said David Knox, senior partner at Mercer Australia. An annuity is a financial product commonly used by retirees that provides a guaranteed income for life.

Even state pensions, which typically make annual adjustments known as “cost-of-living adjustments” (COLAs) to reflect rising inflation, are struggling in many cases to keep up.

“The typical pension system gives 1-2% COLA every year. We see costs increasing by that amount every month,” said Chris Janeway, founder of financial advisory firm Fourth Point Wealth. “For those who have retired on a steady income, it’s a massive drain to see their food and travel costs soar.”

In the meantime, savers who are still working might be tempted to lower or stop their pension contributions or even jump into their pension funds to help meet short-term costs. However, financial advisers cautioned against such moves whenever possible.

If you’re nearing retirement, experts advise continuing to tuck unneeded money into pensions and investments for easily accessible cash. That gives it the best chance of staving off the effects of inflation over time.

“For younger workers who have time to see their wages catch up with inflation, and who are generally believed to have significant exposure to stock markets” — say, via a 401(k) — “are the effects of inflation.” painful at the moment but unlikely to be devastating in most cases in the long term,” said Luke Bailey, senior counsel at US law firm Clark Hill.

In fact, now could be a good time to top up your retirement savings by investing additional funds in a personal pension plan or alternative investments.

“While it is extremely important to leverage the company-like contributions to a retirement fund, individuals may want to consider investing in a self-managed retirement account, along with other investments such as real estate,” Julie Gillespie, head of market research at financial analysis firm TipRanks, said.

The earlier you are in your career, the more risk you can consider taking on your investments to get the highest returns over the long term. However, as you reach the later stages of your work journey, you may wish to reduce this level of risk in preparation for withdrawal.

If you’re already retired, there are a number of tools you can consider to better manage your pension, including converting it into an annuity or buying financial products specifically designed to fight inflation. This could include Treasury Inflation-Protected Securities (TIPS) in the US

“Investing in TIPs is a defensive move and will not recoup dollars already lost to inflation, but now could be a good time to get exposure to TIPs as a relatively low-risk way to protect yourself from the ravages of future inflation protect,” Bailey said.

Retirees may also consider moving their money away from the bank, where cash savings will be depleted even as interest rates continue to rise, to alternative short- and medium-term investments.

“There’s a lesson for retirees to learn that if you’re going to withdraw your money for the next few years, don’t put it all in the bank. Look for a broader range of investments,” Knox said.

That could include investing in broad funds or picking stocks that could do well in a stagflationary environment. Stagnation describes an environment of slow economic growth coupled with rising inflation.

“Defensive stocks in sectors that will do best as the economy moves into stagflation territory are ironically utilities, but also health care and consumer staples,” said Ed Monk, associate director of personal investments at Fidelity International.

“The energy sector is another place to look as companies like Shell and BP benefit from rising energy prices,” he added.

More immediately, however, it may be prudent to cut all non-essential expenses and employ money-saving techniques such as weekly budget reviews until markets stabilize.

“Families, and seniors in particular, need to start thinking critically about their budget at times like these. They probably planned for 3% inflation before retirement, and jumps to 8% and above drastically change that plan,” Janeway said.