Inflation, uncertain markets and a limited Social Security COLA are among the financial hurdles for retirees in 2025.
Retirees face some financial hurdles this year. Inflation has lasted longer than many experts had predicted, and the bond market is signaling that investors believe inflation may tick higher again this year. High interest rates are also throwing a wrench into investment decisions.
As if that weren’t enough, an uncertain stock market adds another layer of unpredictability, making it harder to plan long-term. Despite these challenges, there’s not much relief from Social Security, where the cost of living adjustment for 2025 is relatively modest.
Here’s a look at the challenges ahead and what retirees can do to successfully navigate them.
In a December report, Bank of America analysts expect high prices to stick around for a while, with the outlook for Federal Reserve rate cuts now murky.
“Progress on inflation has stalled of late, and there are upside risks to inflation on the horizon,” analysts wrote. “We, therefore, expect the Fed to slow the cadence of cuts in 2025 to once per quarter from every meeting and maintain our terminal rate forecast of 3.75% to 4.0%.”
Inflation cuts into everyone’s buying power, but it brings unique concerns for retirees, who typically have limited ability to generate income from new sources.
“Rising prices in 2025 are making it harder for retirees to cover everyday costs like groceries and health care,” said George McFarlane, president in an email.
This can cause people to withdraw more money from their savings, which could make their money run out faster, he said.
However, McFarlane also noted that retirees have some ways of mitigating inflation’s effects.
“Since people are living longer, it’s really important to plan carefully. Adjusting how much money you take out of your savings each year, finding new ways to earn income or investing in tools like Treasury inflation-protected securities can help protect your savings from inflation,” he said.
Bond markets are signaling that they anticipate rate cuts this year, but only to a level near 4%, as Bank of America analysts also expect.
Rate cuts, and interest rates in general, have a significant effect on portfolio returns, something retirees should consider carefully.
“For the past year or two, we’ve gotten used to high interest rates. That means many people may have too much cash sitting on the sidelines,” said Jay Zigmont, founder and CEO of Childfree Wealth in Mount Juliet, Tennessee, in an email.
“The challenge is that while you get interest on your cash, it rarely will keep up with inflation,” he said.
That means now is the time for investors to figure out exactly how much cash they need to keep on hand and invest the rest, he added.
For fixed-income investors, there may be a silver lining if rate cuts fall short of expectations.
“Higher interest rates present opportunities to secure attractive yields across short- and long-term instruments,” said Anthony Saccaro, president at Providence Financial & Insurance Services in Woodland Hills, California.
Retirees can capitalize on this by locking in these higher yields now, he said. That would allow predictable and reliable income streams.
“Additionally, the extended period of elevated rates provides more flexibility to diversify fixed-income strategies, ensuring portfolios remain resilient against potential rate fluctuations,” Saccaro added.
In addition to Fed actions and fixed-income yields, retired investors must monitor the equity market, which ran red-hot in 2023 and 2024, driven by technology stocks and enthusiasm about artificial intelligence-related companies.
Stocks, which add growth, as well as risk, to portfolios while helping investors stay ahead of inflation, may continue to perform well, analysts say.
According to data compiled by investment researcher FactSet, analysts expect the S&P 500 to report double-digit earnings growth in 2025, with an estimated earnings growth rate of 14.8%. That would be higher than the trailing 10-year average of 8% earnings growth.
“It is interesting to note that analysts believe earnings growth for companies outside the Magnificent 7 will improve significantly in 2025,” wrote John Butters, vice president and senior earnings analyst at FactSet, in a January report.
Strong company performance may carry more weight than Fed projections for interest rates, and rate cuts and offer some optimism for retirees.
“While we anticipate 2025 is likely to be more volatile than the remarkably low volatility environment of 2024, the fundamentals remain supportive for both equities and fixed-income assets,” said Garrett Melson, portfolio strategist at Natixis Investment Managers in Boston, in an email.
“And it’s those fundamentals that matter more for the outlook than the exact number of cuts,” he said
Social Security recipients will receive a 2.5% cost-of-living adjustment this year, down from 3.2% in 2024. The COLA is based on the Consumer Price Index’s inflation data.
Despite the increase, retirees may still see a decrease in their spending power.
The Social Security COLAs often fail to keep pace with real inflation, especially after factoring in rising Medicare Part B premiums, Saccaro said.
“For this reason, retirees should avoid relying on COLAs from Social Security to offset inflationary pressures,” he said.
Instead, Saccaro said clients or their advisors should turn to investment strategies that provide cost-of-living adjustments, such as interest and dividend-producing assets along with dividend-paying equities.
“This proactive approach ensures retirees maintain their purchasing power and financial independence, regardless of Social Security adjustments,” Saccaro said.
https://money.usnews.com/money/retirement/articles/outlook-for-retirement
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