Inflation and Your Retirement Plan

Lately, it seems we’ve all had to learn more about global economics than we’d like. Thanks to the COVID-19 pandemic, extreme weather in essential manufacturing regions and a container ship mishap in the Suez Canal that wreaked havoc on deliveries for months, there’s no shortage of reasons for soaring prices and low-stocked shelves. With so much uncertainty in the world and all around, you may feel like holding onto cash is a safer bet. But if inflation is on the rise, a dollar today could have less buying power than a dollar tomorrow.

You may have had to adjust your budget to compensate for rising prices, but have you considered shoring up your retirement savings against the risk of inflation?

Inflation and Your Buying Power in Retirement

Inflation impacts the “real value” of investments in your retirement plan because the same amount of money may give you less spending power later. If your expenses are $2,000 per month now, you might need $3,500 during retirement, just to maintain the same quality of life — all thanks to inflation.

Countering Inflation in Your Retirement Portfolio

If you’re worried about how inflation may impact your 401(k) performance and retirement plan, there are some things you can do to compensate, increasing the chances that you will have more spending power in your golden years.

• Look for investment products that yield the same returns as the rate of inflation, or greater. When inflation is historically 2% to 3% annually, keeping most of your money in a bank account or CDs may not cut it. Look for investments likely to have higher annualized returns than inflation.
• Diversify your 401(k) portfolio between stocks, bonds and mutual funds. Not all asset classes and individual investments are equally impacted by inflation. Diversifying can help you manage your risk tolerance while still staying ahead of inflation.
• Look at treasury inflation-protected securities (TIPS). If you’re concerned about risk, TIPS can help. These are treasuries that offer returns designed to keep pace with inflation, allowing you to at least see returns that preserve your buying power.
• Consider investing in gold. Even though gold is sometimes thought of as a hedge against inflation because it traditionally moves opposite to the U.S. dollar, this isn’t always the case. When diversifying your assets, consider gold, but be wary of relying too heavily on it.
• Identify sectors with superior performance. Some sectors, like energy and commodities, often beat inflation. Including funds or stocks in these sectors in your portfolio can sometimes help mitigate inflation risk.

Impact on Retirees

Inflation can be more of an issue when you’re on a fixed income or close to retirement. Speak to your financial professional about strategies to deal with inflation, especially if you’re planning on leaving the workforce soon.