By Brett Gottlieb
When the economy is in flux, it’s easy to worry about the future of your finances. As the cost of goods and services increases, it affects not only our day-to-day spending, but also can affect our savings and investments.
If retirement is right around the corner, will inflation dampen your plans?
Let’s take a look at six strategies you can use to keep your retirement on time and on track.
Why Is Inflation a Threat?
Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired.
The Consumer Price Index (CPI), which is a common measure of inflation, ended the year with an annual inflation rate of 6.5%, still quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years.
As the cost of goods rise, many retirees are left with a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.
What Can You Do to Safeguard Your Savings?
Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.
1. Reassess Your Budget
The first step in overcoming inflation is to understand its impact on your overall financial plan. The unfortunate fact is that most people have unlimited wants with only limited resources.
Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.
For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan.
Reassessing your budget is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run.
If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.
2. Borrow Sooner Rather Than Later
It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will be paid back with money that is worth less than it was when it was originally borrowed.
This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.
3. Consider TIPS
Another great way to overcome inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they will not earn the highest rate of return, but your purchasing power will remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding.
4. Diversify Your Income
Retirees often have several sources of income, but they are usually relatively fixed in amount. If your expenses are greater than these income sources, you will be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only will this improve your portfolio longevity and provide you with more flexibility in retirement, but it will also help minimize the impact of inflation.
Diversified income streams act in much the same way that diversified investments do. They allow for less demand on any single income source so you have the flexibility to handle increased costs or unforeseen events without depleting your portfolio reserves. There are many ways to diversify your income, including:
- Invest in real estate. Owning rental properties is a great way to earn passive income without dipping into your retirement savings. Real Estate Investment Trusts (REITs) are another popular option.
- Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You will earn less than what you’re making now, but these options will provide flexibility and a form of income diversification that will keep your retirement savings safe from inflation.
- Use dividend-paying stocks. Often considered an annuity-like cash stream, dividend- paying stocks give company earnings to investors, typically once a quarter. The top dividend-paying stocks even raise their payouts over time. This not only gives you an income stream, but you can also reinvest the dividends to pursue more growth.
5. Consider Alternative Investments
Alternative investments are another option in the fight against inflation. Most have low correlation with standard asset classes, which can smooth portfolio volatility. Hard assets, like real estate, timber, oil, and gold, may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio may provide broader diversification, reduce risk, and increase returns.
6. Put Idle Cash to Work
You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation will eat away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate.
For instance, high-yield savings accounts are paying up to 4% interest as of December 2022. While this is still a far cry from the 6.5% inflation rate, it is much better than the 0% interest you would earn from most checking accounts.
There are other options that can improve your interest rate while still keeping your funds relatively safe, including money market accounts, certificates of deposit, and short-term Treasury bills. No matter which option you choose, managing your excess cash with inflation in mind is the best way to improve your portfolio longevity and safeguard your retirement.
Is Inflation Threatening Your Retirement?
If retirement is around the corner, you’ll want to reassess your retirement plan to safeguard against inflation. At Comprehensive Advisor, we believe everyone should be able to live the retirement they’ve always wanted. Our team of professionals helps individuals and families create a well-thought-out strategy, using a variety of investments and insurance products and services, designed to help them address financial needs and concerns and pursue their ideal retirement.
Your dreams matter. When you partner with us, we’ll assess your financial situation and only make recommendations that are in line with your unique goals—and we do so with integrity and transparency. If you’re ready to start the conversation, email us at info@ComprehensiveAdvisor.com or call (760) 813-2125.
About Our Advisors
Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees, in business administration and economics, and is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals, and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.
Our team of qualified professionals have experience in the financial service industry, and our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial
solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.
Investment advisory services made available through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor are not affiliated companies. Insurance products are offered through the insurance business Comprehensive Advisor, LLC. Comprehensive Advisor, LLC is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. AEWM does not offer insurance products. The insurance products offered by Comprehensive Advisor, LLC are not subject to investment Advisor requirements. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Neither the firm nor its representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.
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