Find out how to Defend Your Retirement From Inflation
Inflation Risk: Should You Worry About Inflation And Your Retirement?
Inflation is a dirty word when it comes to retirement planning. We’ve been lucky for a while. Over the past four decades, the United States has seen record inflation rates. However, inflation risk can change and you should consider ways to protect your retirement from the possibility of inflation.
This week, the US Bureau of Labor Statistics reported that April consumer prices rose at the fastest rate in more than a decade. Higher prices were expected due to increased demand for goods and services as we emerge from the pandemic while supply lags. The big jump, however, surprised economists, who widely forecast a more modest increase. The risk of inflation is becoming more apparent than before.
Nobody can predict the future. Economists try, but spreadsheets are not a crystal ball for predicting inflation risk.
Here are some thoughts on the current situation:
Is it just temporary? There is a good argument that this is a temporary jump. Prices have fallen dramatically over the past year, and it is reasonable to see a surge to at least pre-pandemic levels when the economy comes back to life.
There is currently an increased demand for goods and services, but also for supply bottlenecks that drive prices up. Many people believe that once these trends normalize, inflation will cool off.
Could prices continue to rise? While inflation out of control (as it was in the 1980s) is unlikely, some experts are predicting higher inflation growth than it has been for a long time.
If the prices of some things go up, other companies are more likely to go up. Kristin Forbes, MIT economist and former Treasury Secretary and Bank of England officer, told the New York Times, “Now the genie is out of the bottle. When everyone else is raising prices it will become a lot easier for you to do too. “
What is the fallout? The stock markets have reacted badly to the inflation news.
The problem is not just inflation, however. If sustained inflation seems possible, the Federal Reserve will likely raise interest rates to slow inflation. This move, which makes credit more expensive, could slow overall economic growth.
Basically, inflation makes goods and services more expensive and reduces the value of your money.
Perhaps these famous people best define it:
“Inflation is when you pay fifteen dollars for a ten-dollar haircut that you got for five dollars before you had hair.”
– Sam Ewing
“Inflation is as violent as a robber, as terrifying as an armed robber and as deadly as a killer.”
– Ronald Reagan
“One idea of inflation comes from a youngster getting their first job at a salary you’ve dreamed of at the height of your career.” – Bill Vaughn
“Bankers know history is inflationary and that money is the last thing a wise man will hoard.” – William Durant
“Inflation is the crab in your savings.” – Robert Orben
“Inflation is when sitting on your nest egg doesn’t give you anything to crow about.” – unknown
The fourth edition of the American Heritage Dictionary of the English Language defines inflation as “a sustained rise in consumer price levels or a sustained decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services.”
When you work, your wages generally go up as the cost of goods and services go up. Your earnings “keep up with inflation” so normal inflation is generally not a big problem. However, if you live on savings, inflation is literally robbing you of income.
Most people underestimate the impact inflation has on their retirement savings. Even at relatively low rates, inflation is a real thief of purchasing power over time.
Most experts feel confident recommending that individuals calculate their retirement needs using an inflation rate of 3 percent. However, it is important to understand that (as in the late 1970s and early 1980s) we have seen sustained inflation rates of around 10 percent!
So the risk of inflation is a real threat to your ability to maintain the quality of life you want in retirement.
Here are 8 ways to protect your finances:
Inflation planning should be a major concern when creating a retirement plan.
You should assess the health of your retirement savings at different rates of inflation. (Don’t just trust the default values hidden in many simple retirement calculators.)
You should know what will happen to your finances if inflation goes up 2% or 10%. NewRetirement’s Retirement Planner gives you both optimistic and pessimistic controls on inflation rates. You can also set optimistic and pessimistic inflation values for general expenses, housing costs, and medical expenses (these categories usually increase at different rates).
Try different scenarios to see if your quality of life is safe with different inflation rates.
You need to have your retirement plan solid no matter what. As a result, you may need to be prepared to adjust spending and your investment portfolio if inflation rises to your predicted pessimistic level or worse.
Also, be prepared for a shift in the expected returns on your investments as inflation puts pressure on other economic metrics such as interest rates.
Real estate and commodities are assets that have intrinsic value and usually increase in financial value during periods of inflation.
Discover 8 Ways To Invest In Real Estate For Retirement.
Traditionally, owning a home and using a debt (a mortgage) has been a great way to build wealth and hedge against inflation because you:
- Do you have the hard capital – the house
- Use debt to finance part of the home. In recent history, inflation has helped make it easier to pay off this debt (assuming you work and convert your human capital into dollars).
You’ve probably heard that the older you get, the less risky your investments should be. While this is absolutely true, you also need your savings growth to keep up with inflation. For example, if you get an 8% return on your investments but inflation is 3%, you are actually only making 5% of your money.
Investing in stocks is usually the best way to keep up. Treasury Inflation Protected Securities (TIPS), inflation-protected annuity funds, floating rate funds, and equity index funds are other options.
Your age portfolio should be carefully crafted to provide you with:
- The growth you need to keep the purchasing power of your wealth pace with an inflationary economy
- Rest assured that you are not losing the money that you have to spend
In fact, stocks serve as a hedge against inflation. How? Inflation is defined as a general increase in the prices of goods and services. Companies sell goods and services. When inflation hits, these companies suddenly start generating more revenue, which means their fundamentals look better and more attractive to investors. Hence, their stock prices tend to rise with inflation.
Would you like help with your inflation and investment strategy? NewRetirement offers advisory services through a subsidiary called NewRetirement Advisors. You can get financial advice and guidance from a Certified Financial Advisor (CFP) who will work with you and use the NewRetirement Retirement Planner and PlannerPlus to help you manage and achieve a secure future. You can find out more here.
If there is a difference between your guaranteed lifetime income (social security and pensions) and what you need to spend, consider how you can bridge that gap. Lifetime annuities are one way of guaranteeing your income. Just buy an inflation-protected pension.
When inflation rises, wages usually rise too. So work can be an excellent cure for inflation problems.
Here are some resources you can use to find out if a retirement job is of interest:
There is no way of knowing what will happen to inflation, interest rates, financial markets, your health, and much more. And while you cannot see THE future, you can look into several possible futures by running different scenarios with your financial plans.
This is a great way to build confidence in your ability to fund the future that you want to have.
Use the NewRetirement Planner to try different possible economic situations and how you can offset negative consequences.
- A part-time job in a time of high inflation
- Reduce costs when investment returns are lower than expected
- Buy a lifetime annuity. How does this affect your wealth now and your property value in the future?
- Postponement of investments (and possible returns)
- And more…