When it comes to money, inflation is like a termite: It’s small and seemingly innocuous initially, but it can do severe damage over time.
Inflation is the gradual increase in the prices of goods and services. It is measured as the rate at which the cost-of-living rises. And while a bit of inflation is good for the economy (it encourages spending and investment), too much may be detrimental.
Inflation is often thought of as affecting prices in the short term, but it can also significantly impact long-term financial plans like retirement. For example, let’s say you have $100,000 saved for retirement and expect to retire in 20 years. Assuming an inflation rate of 3%, your $100,000 will be worth just over $74,000 in today’s dollars by the time you retire. In other words, the purchasing power of your retirement savings will be eroded by inflation unless you take steps to protect it.
Solutions?
To combat the effects of inflation, you need to invest in assets that may keep up with or exceed the inflation rate. Otherwise, your retirement savings could dwindle over time.
It is difficult to know what category of investments to select. Many people have chosen major Indices such as the S&P 500 Stock Index, but like all choices, there may exposure to risk. You can also ladder your investments, which means investing in a mix of short-, medium-, and long-term assets. This strategy may help smooth out the effects of inflation over time.
But, these kinds of investments are still considered high-risk, and there is no guarantee that they will outperform inflation rates. So, before investing your hard-earned money, you need to be comfortable with the risks.
Safer solutions?
If you’re uncomfortable taking on too much market risk, you can still help offset the effects of inflation by investing in annuities and other insurance products.
An annuity is an insurance product that may provide guaranteed income for life. When you purchase an annuity, you’re essentially pre-paying for your future income. When set up correctly, this income may be protected from the effects of inflation.
While there’s no way to eliminate inflation’s effects completely, you may help protect yourself from the long-term damage it can cause by staying informed and using a combination of safe money strategies.
If you’re worried about how inflation might affect your retirement savings, contact an insurance professional today to learn how these products may help.
