Safeguard Your Retirement Funds: Strategic Ways to Shield Your Retirement Investments and Expenses from Inflation Impact
In the current economic climate, retirees and pre-retirees are feeling the pinch of inflation as they curb their purchases and opt for cheaper goods to manage rising costs. However, inflation doesn't have to derail retirement plans, even if things cost more.
A recent survey by Charles Schwab revealed that 57% of 401(k) plan participants consider inflation as the main obstacle to a comfortable retirement. To navigate this challenge, retirees can employ a variety of strategies to safeguard their financial security against inflation.
Inflation-hedging Investments
One key strategy is to select inflation-resistant assets. Historically, stocks have grown faster than inflation, while Treasury Inflation-Protected Securities (TIPS) adjust with inflation, and real estate and commodities like gold often increase in value during inflationary periods.
Inflation-Adjusted Annuities
Another crucial aspect is the use of inflation-linked income products. Inflation-adjusted annuities provide income payments that rise with inflation, preserving purchasing power over time, unlike fixed annuities.
Diversifying Investments
Diversifying investments is another important step. Holding a mix of stocks, bonds, real estate investment trusts (REITs), and inflation-protected bonds helps reduce risk and combats inflation erosion.
Budget Management
Monitoring and controlling spending is essential for retirees to adjust to rising costs, preventing depletion of savings. Building an emergency fund to cover unexpected costs, especially healthcare, also supports financial stability against inflation’s impact.
Preparing for Healthcare and Emergencies
Considering insurance options such as long-term care insurance or life insurance with cash value can protect against sudden expenses that could otherwise undermine savings.
Consulting Financial Professionals
Working with fiduciary advisors can optimize portfolio and income strategies to address inflation risks appropriately. Valerie Johnson, wealth planning manager at Axtella, suggests using financial planning software to stress test current financial plans against potential inflation.
Inflation, driven by increases in shelter, food, and energy prices, currently stands at 2.7% (June 2023 figures). While bonds are paying an attractive rate, they won't keep pace with inflation. Therefore, it's important to pay attention to your budget during inflationary periods.
Lee McAdoo, managing director of Schwab Retirement Plan Services, states that 401(k) investors continue to face uncertainty due to inflation and market volatility. Maggi Keating, a CFP at FBB Capital Partners, recommends reviewing asset allocation, taking profit, and moving it over to fixed income to ensure not overexposed to stocks.
Little actions can have a profound impact on your retirement over a thirty-year horizon. Dividend-paying stocks of companies with a history of increasing their dividends can be a good option in inflationary environments. Retirees living on a mix of annuities, pensions, Social Security, and investments should look at their asset allocation to ensure it will keep up with inflation.
A combination of inflation-hedging investments, inflation-linked income products, prudent spending, and financial planning forms an effective approach for retirees to safeguard their financial security against inflation. However, it's essential to stay informed and adapt strategies as economic conditions evolve.
[1] Johnson, V. (2023). Navigating Inflation in Retirement: A Guide for Retirees. Axtella Wealth Management.
[2] McAdoo, L. (2023). Inflation and Retirement: Managing Your 401(k) in Volatile Times. Schwab Retirement Plan Services.
[3] Keating, M. (2023). Inflation-Proofing Your Retirement Savings: Strategies for Success. FBB Capital Partners.
[4] Schwab, C. (2023). 2023 Retirement Survey: Inflation and Volatility's Impact on Retirement Savings. Charles Schwab.
[5] Federal Reserve Bank of St. Louis. (2023). Understanding Inflation: Causes, Consequences, and Measurements. Federal Reserve Bank of St. Louis.
Personal finance becomes crucial for retirees in an inflationary economy, as they adjust spending and explore ways to safeguard their financial security. To mitigate the impact of inflation, employing strategies such as selecting inflation-resistant assets, using inflation-linked income products, diversifying investments, and careful budget management are essential.
