Since reaching a high of 9.1 percent in June 2023, inflation has significantly decreased to 2.5 percent as of August 2024 compared to the previous 12 months, as reported by the Bureau of Labor Statistics.
Despite the decrease, many Americans may still be concerned about how rising prices can impact their retirement savings, especially after experiencing the highest inflation in almost 40 years.
Sean Lovison, a certified financial planner at Purpose Built Financial Services, emphasizes the importance of ensuring that investment returns outpace inflation to maintain the real value of a portfolio over time.
One way to safeguard your portfolio from inflation is by working with a financial advisor. These professionals utilize retirement planning software to analyze various scenarios based on different inflation rate assumptions, offering more detailed insights than online calculators or personal calculations.
How a financial advisor can assist in combating inflation
Financial advisors utilize retirement planning software to examine different scenarios for your portfolio based on various inflation rate assumptions. These programs provide more precision and detail than online retirement calculators or individual calculations.
“Stress-testing a retirement projection like this provides an indication of how sensitive a given client’s financial plan is to higher inflation,” says Paul Winter, a certified financial planner at Five Seasons Financial Planning LLC.
Winter often explores scenarios where inflation is at 3 percent for clients. This approach helps advisors better prepare for potential cash flows and investment returns during retirement, aligning with the historical average of inflation over the last century.
How inflation affects your financial plan
Considering inflation in your retirement plan can be challenging without expert guidance. Neglecting inflation’s impact on your portfolio can be a costly mistake for retirees or individuals nearing retirement.
“The impact can be particularly detrimental for retirees drawing down their savings because they might run out of money sooner than anticipated,” says Lovison.
Retirees, in particular, are more negatively affected by higher inflation due to fixed incomes and lack of potential wage growth to offset rising prices.
Retirees heavily invested in cash and fixed-income assets, such as bonds, are at risk as higher inflation erodes the value of cash over time.
While Social Security provides a cost-of-living adjustment (COLA) based on the Consumer Price Index, rising Medicare premiums and healthcare costs can offset a significant portion of the increase.
Pensions are also vulnerable to inflation, as they are not always adjusted to account for rising prices.
6 strategies to outpace inflation
Inflation poses a challenge for investors, especially those with minimal exposure to stocks and significant holdings in cash or bonds.
Here are some strategies to help mitigate inflation risk in your retirement portfolio:
Look at stocks
Historically, total returns from stocks have outperformed inflation over the long term. While past performance does not guarantee future results, equities have provided strong returns, making them a valuable investment during inflationary periods, especially for younger investors.
It’s essential to consider individual stocks with pricing power that can increase prices as the cost of goods rises. Value stocks with strong balance sheets and healthy cash flows are favored by some experts over growth stocks in an inflationary environment.
While equities can accelerate growth, they can also be volatile during high inflation. Diversifying your portfolio with different sectors and asset classes through index funds or ETFs can provide stability.
Consider fixed-income investments
Although fixed-income investments may seem risky during high inflation, securities like inflation-indexed bonds can protect your portfolio by adjusting principal and interest payments with inflation.
Some fixed-income assets to consider include Treasury Inflation-Protected Securities (TIPS), shorter duration bonds, and Certificates of Deposit (CDs).
Shorter duration bonds are less sensitive to higher interest rates, which usually accompany inflation. Inflation-indexed bonds offer a fixed return linked to prevailing inflation rates.
CDs from online banks with higher interest rates can be a viable option to offset inflation’s impact.
Think about your cash—and where you keep it
Cash in traditional savings accounts is vulnerable to inflation as it earns minimal interest, leading to a loss of purchasing power over time. Evaluating the amount of cash needed and investing the rest in retirement accounts can reduce inflation risk.
Having an emergency fund and cash for significant purchases is essential. Utilizing high-yield savings accounts can help offset inflation’s erosion by offering higher interest rates.
Delay Social Security
Delaying Social Security until at least your full retirement age or even age 70 can increase your monthly benefit significantly. Each month of delay past your full retirement age results in a higher check, providing substantial returns compared to inflation.
Another advantage of delaying Social Security is the larger cost-of-living adjustments (COLA) as a percentage of your total benefit.
Start planning now
Inflation is less concerning for young investors with long investment horizons. However, staying aware of inflation’s impact on your portfolio’s future value and planning accordingly is crucial for all investors.
Beginning retirement planning early allows for stress-testing and adjustments to goals and cash flow over time, ensuring a secure financial future.
Consult with a financial advisor
Planning for inflation can be challenging, especially without professional guidance. Working with a financial advisor can help position your portfolio to withstand inflation without major adjustments. Advisors can provide projections, suggest modifications, and ensure you stay on track to meet your financial goals.
Finding a financial advisor near you, such as through the CFP Board’s database, can offer valuable insights and protection against inflation’s effects.
Bottom line
Protecting your portfolio against inflation requires choosing the right strategy tailored to your age and risk tolerance. Whether adding growth stock ETFs or exploring inflation-indexed securities, seeking advice from a fee-only financial advisor can help navigate rising prices and secure your retirement plans.
Expert guidance is key to effectively managing inflation’s impact on your investments and ensuring financial security in uncertain economic conditions.