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Protecting Your Retirement Nest Egg Against Inflation

David Hicks

You’ve probably heard a lot about inflation recently. As a refresher, inflation is the increase in the cost of living over time. Remember when gas cost 99 cents per gallon—and now, New Mexico, you’re paying  close to $3.00 a gallon or more? That’s an example of inflation.

Inflation eats away at the purchasing power of your money over time. In other words, the money you have saved today won’t go as far in 10 or 15 years. Perhaps one of the biggest reasons inflation risk is so overlooked is because it’s been growing at such a low rate for a long time—basically since the early 1980s. But that doesn’t mean it still doesn’t pose a threat.

Here are some tips that may help you manage inflation risk:

  • Look at your retirement budget and figure out what you’ll need to “earn” each year. By that, I mean how much money you’ll receive between Social Security benefits and retirement savings withdrawals. Now imagine how your budget might be affected by interest-rate movements. Pay special attention to healthcare costs, which for most retirees are the single largest expense.
  • Delay taking Social Security benefits. According to Morningstar, the average person will earn about 8% more income for every 12 months they put off claiming Social Security past their retirement age. In other words, waiting to take Social Security acts almost like a built-in inflation hedge.
  • Using your investments as a hedge against inflation. Treasury inflation-protected securities (TIPS) and real estate investment trusts (REITs) are two possible conventional solutions. Neither asset class is highly correlated to the stock or bond markets, so they may offer attractive diversification benefits for your portfolio.  Considering an accumulation annuity an alternative – or replacement – to fixed income could provide you an opportunity to earn interest that is tied to market upside (and not downside), helping your portfolio keep up with inflation.

Does your retirement strategy have what it takes to resist inflation? If you’re not sure, click here to set up some time to speak to one of our financial advisors.

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