Tips On Protecting Retirement Fund from Inflation

It’s not fair that you must pay more for the same old rent, gas, food, necessities, and other amenities. Prices for just about everything are skyrocketing these days. And you need to do something about it fast. 

Higher Costs Everywhere 

Inflation is proving to be a major impediment to budgeting. It is all too clear that it won’t slow down any time soon. 

Persons living on fixed incomes like retirees will be the most badly affected. If you belong to this category, then you should protect your purchasing power before it is too late. 

The 5.9 percent cost of living adjustment on Social Security will certainly blunt the effect of inflation. However, it may not be enough for you to keep up with rising prices. However, this already meager increment has already been offset by the Medicare premium hike of 14.5 percent. 

Strategies For Coping With Inflation

You may have to look towards an additional source of income like a part-time job so that your retirement portfolio does not diminish. To protect your retirement funds, you will need to invest in asset classes whose value normally rises with inflation, like real estate, gold, and other commodities. You can also think of buying US Treasury Inflation-Protected Securities since these are financial debt instruments where the interest that you earn can be increased according to inflation levels. 

Bonds vs. Stocks – Which is Better for Your Portfolio During Inflation?

One of the best long-term strategies for keeping up with inflation is to invest more in stocks. This might seem counter intuitive. However, investing in the long term in stocks can prove to be lucrative. 

Since the average return on investments over the past several decades has averaged around 9 percent, which is much higher than bonds and other such ‘safe’ investments. The average rate of return on stocks over the past 2 decades has stood at around 7.5 percent. 

During the past 3 decades, the rate of return on stocks has been over 10 percent. During the past five years, stocks have grown at a mouthwatering rate of around 14 percent. 

Hence, stocks are the asset class that you need to keep up with inflation. There is no doubt that stocks are volatile and that they can undergo intense losses. However, when their performance is averaged out over the long term, it can be seen from the figures mentioned above that the overall performance of this asset class is exceptional. And much better than bonds. 

Bonds may appear to be safe. However, bonds will incur almost guaranteed losses in the face of inflation since meager bond return rates simply cannot keep up with rising prices. It is recommended to talk to your financial advisor about shifting the focus from bonds to stocks. 

Conclusion

How to protect your retirement funds from inflation? The strategy outlined above can provide a degree of protection to your precious fixed income.