“A lot of financial services marketing claims that buying their products is the best method for combatting the erosive effects of inflation. Don’t believe the hype.”- Joseph Zimmermann.
Nearly everyone worries about inflation, especially retirees and those about to retire. It’s a valid concern. Inflation describes increases in the cost of goods and services over a specific time period. When you think about all the things which can erode a person’s wealth and degrade their lifestyle in retirement, inflation ranks near the top.
Here in the United States, the Consumer Price Index (CPI) broadly measures inflation. The CPI provides a weighted average of prices paid for commonly purchased goods and services.
In May 2021, the annual inflation rate in the United States hit 5%, the highest level in over 12 years. This upward trend shows no sign up stopping in 2022 and could last into 2023.
You’ve probably heard that moderate inflation levels are a sign that an economy is healthy and thriving. However, rapid, astronomical price increases such as those we are currently experiencing have historically been destabilizing and wealth-eroding.
Many people’s retirement savings are jeopardized by inflation because most retiree portfolios skew toward “safe money” vehicles such as life insurance, bonds, and annuities. While it’s true that safe money investments tend to be less volatile than other investments, they are vulnerable to the ravages of inflation, lowering the purchasing power of income streams. Since this is the case, you may be asking, “So, what can I do to keep my nest egg from getting whittled away by inflation?”
You must understand there is NO magic bullet. No single financial product provides an impenetrable, inflation-stopping shield around your cash. Fortunately, though, there are ways you can blunt inflation’s impact on your nest egg.
Re-evaluate your portfolio. Now is a perfect time if you haven’t looked at your retirement accounts lately. Have your advisor assist you in determining if a rebalance is warranted. For example, you may have most of your money stuck in bonds, CDs, or other safe money products. Too much safety could spell trouble during inflationary times.
Consider investing in cash-flowing businesses or properties.
Ask your financial advisor whether purchasing rental properties or positive cash-flow businesses makes sense for you. In particular, cash-flowing real estate has some fantastic tax advantages, along with the possibility of asset appreciation. However, remember that these types of investments do have risks, and you should always get an expert’s opinion before acting.
Purchase an annuity. If you’ve been hesitant to look into annuity products, you could be missing out on the opportunity to (1) lock in gains and (2) create a lifetime income stream that you can’t outlive. Annuities aren’t magic, and they certainly won’t cure your inflation problem. However, adding an annuity to supplement your Social Security benefit could give you some peace of mind. You may also feel freer to take on riskier investments that could provide greater returns to help offset inflation.
Summing it up: Inflation is a problem for everyone, but it’s especially troublesome as you near retirement. Although no one product will fix the inflation issue, strategies, tactics, and financial products can help. Talk to your advisor today to gain more insights into available products and techniques to help you stay ahead of inflation.