One of the issues you have to contend with when it comes to retirement is inflation. Inflation, at its most basic, is viewed as rising prices. Inflation erodes your buying power, creating a situation in which your dollar does not go as far as it used to. If you consider that inflation has an annual rate, you can see why it would be a problem. If the rate of inflation is 3% annually, and your cash is only yielding 2% annually, you can see that, in real terms, you are actually losing money since your cash will not go as far.
If you want to beat inflation, you need to consider structuring your retirement portfolio carefully. Additionally, you will need to continue to consider inflation as you transition into retirement, since inflation — on top of regular withdrawals — will decrease the effectiveness of your nest egg during your senior years.
Helping Your Retirement Account Beat Inflation
There are three main things you can do to help your retirement account beat inflation. However, it is important to note that any investment can result in loss, and these ideas could also mean losses for your retirement account. Any time you look for higher returns, you are also risking bigger losses.
- Stocks: These are the tried and true investments when it comes to beating inflation. Returns are often high enough (over time) to beat inflation long term, and provide growth. However, you need to have the stomach to ride out market down turns and realize that over 30 years, stocks have yet to lose.
- Inflation protected bonds: The U.S. government offers some bond investments that are adjusted to keep the pace with inflation. These are I-bonds and TIPS. You can keep a portion of your retirement portfolio from the ravages of inflation when you use these bonds.
- Consider commodities: These are inflation sensitive investments that can help you hedge. Precious metals (like gold and silver) and industrial metals (like copper and nickel) are often preferred choices. But natural resources and agriculture can also be helpful. However, it is important to limit commodity holdings in your retirement portfolio to 5% or 10%, since the volatility is greater than many other investments.
You can reduce the ravaging effects of inflation on your retirement portfolio with careful planning, and a commitment to stick to your plan.
Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.