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Worried That Inflation Will Deflate Your Retirement Plan? 5 Tips To Protect Yourself

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by Aaron Leak, founder of ECL Private Wealth Management 

Inflation is rising and so are the concerns of some U.S. consumers. The nearly 1% June jump in the consumer price index brought the total increase over the past 12 months to 5.4% – the biggest spike in annual inflation in nearly 13 years.

Economists disagree on how long inflation will go on and how worried people should be. But whenever the costs of goods and services go up and purchasing power goes down, workers trying to save for retirement need to have strategies to protect their long-term plan.

Inflation can erode your savings, wreck your budget and reduce your purchasing power. Workers who don’t receive regular cost-of-living adjustments are especially vulnerable, as are savers whose money is in accounts that are earning less than the rate of inflation.

As you plan for retirement, you have to remember the money you have today won’t be worth as much in retirement, so you will need more funds to maintain your standard of living. Your savings vehicles need to be outdoing inflation, and retirement plans that ignore inflation and a decline in purchasing power aren’t wise.

Here are five strategies to protect your retirement income plan from inflation:

1. Remain invested in stocks.

The stock market tends to outpace inflation, and investing in companies that perform well in inflationary times –  those that produce, sell or distribute necessities – is a good defense for your portfolio. It’s essential to put a significant part of your portfolio in stocks for growth. You need diversity, including bonds, because they can provide a cushion in a market downturn. A balanced portfolio is the best way to navigate changing economic cycles. When someone reaches their 60s, a 60-40 stocks-to-bonds ratio is considered a safe mix.

2. Invest in real estate.

As inflation rises, so do property values. The upside of owning cash-flow-producing real estate is that along with making money on a monthly basis, your passive-income asset can also keep appreciating. Be sure that the renter’s monthly rent covers the expenses of maintaining the property, and budget to put some away in your retirement plan.

Delay Social Security as long as you can. These payments are inflation-protected with cost-of-living increases built in, but delaying them will give you a larger check later that is also inflation-protected.

3. Purchase annuities.

Annuities generate guaranteed income in retirement. Many annuities offer some kind of inflation protection. But annuities can be complex, so it’s important to consult an advisor to determine which type of annuity could benefit you in the long run. Inflation-protected annuities guarantee a real rate of return at or above inflation and are becoming more popular.

4. Decrease debt.

A record number of older Americans have credit card debt and mortgages, and Leak cautions not to be one of them when you retire. Debt weighs heavier as inflation continues to rise. Having adjustable rate debt could be a big problem when inflation kicks in. Paying off debt should be a top priority before you reach retirement.

Future inflation rates are unknown, and retirement planning should definitely include inflation-protected investments that will more than cover the current average rate of inflation.

Aaron Leak has 16 years of experience in the financial industry and is the founder of ECL Private Wealth Management. He holds Series 7, 6, 63 and 66 licenses as well as life, health, and property and casualty insurance licenses.