6 Ways to Inflation-Proof Your Retirement Plan

Inflation is often called a silent killer of your finances. Not only does it make your spending today significantly more challenging, but it also puts your countless months and years’ worth of retirement savings at risk. 

From May 2021 to May 2022, the monthly inflation measure (Consumer Price Index) hit 8.6%, which is the highest it’s been since 1981. Rising prices will stretch day-to-day dollars of consumer spending, but they can also affect the investment portfolio.  Admittedly, it’s a monthly measurement and these can change quickly, but it nonetheless indicates the economy is running “hotter” than it did pre-pandemic.

The waters of inflation and market volatility are treacherous. This guide will give you six solid strategies to help reduce inflation’s impact on your retirement plan. 

 

1. Review Your Retirement Plan to Ensure You’re on Track

Proper planning is the “drive train” for any investment strategy. Even amidst 40-year highs in inflation, double-check to make sure that your investment plan is tailored to your personal investment objectives.  What’s your time horizon? Do your investments track to when you’ll need the money? Is your portfolio’s risk level appropriate for your tolerance and financial goals in the future?

There are no universal “right” answers to these questions. They are completely unique to you as an investor. It’s important that your portfolio is aligned with your goals, needs, and financial priorities.

Once you’ve accumulated appropriate emergency savings (e.g., typically three to six months’ worth of living expenses), putting your money to work is one of the best defenses against an inflationary environment. A sound investment allocation policy is highly to outpace inflation over the medium to long term.  Review your retirement plan, invest accordingly, and stay the course. You’ll be able to withstand the headwinds of inflation and your money will be working for you simultaneously.  It is best to rely upon a team that adheres 100% to the fiduciary standard in formulating planning advice for clients.

 

2. Consider Inflation-Resistant Assets

During periods of high inflation, not all investments are treated equally. How you go about selecting securities in your portfolio should be a well-defined, vetted process. 

Inflation-Protected Bonds

Bonds and bond funds can be instrumental for retirees in their portfolio construction. . Since bonds pay interest annually or semi-annually (and have considerably lower risk than stocks

potentially), they can be very appealing to investors looking for a fixed income.  However, most bonds pay a fixed rate of interest and consequently can fall behind inflation when inflation rates rise.

An attractive fixed income investment during inflationary times is Treasury Inflation-Protected Securities or TIPS. These are automatically adjusted in face value to match the current rate of inflation, so they pay interest based on it. This can mean an increase in returns when inflation rates increase.

If you own a $10,000 (face value) TIP with a 1% coupon rate (interest payment) rate and the inflation rate hits 2% that year, you will receive interest payments as if you invested $10,200, not $10,000. This is because the bond’s face amount gets adjusted by the current 2% inflation rate.

If inflation is zero for that year, you’ll receive the 1% without adjustments. In the meantime, when forming your financial plan, be sure to explore inflation-protected assets with your investment advisor.  The various trade-offs are more complex than what we can fully review in this medium.

Stocks

Stock investing can be an excellent potential inflation hedge. While there’s no guarantee that stocks will outpace inflation, history shows that the return from equities can greatly outpace inflation. 

During periods of inflation, consumers tend to spend less on luxuries and more on essentials.  Thus, in some cases, companies in food/grocery supply, consumer essentials, and discount retailers can perform well. Stocks that pay dividends can also be a helpful choice. When you receive a dividend, you’ll receive it in current (not inflated) dollars.

While it’s true that adding stocks to your portfolio mix can introduce risk, fundamentally speaking, inflation itself is a somewhat known and unavoidable risk. Finding the proper mix of bond and stock type investments can lead to long-term success.  Talk to your financial advisor to be sure you’re comfortable sticking to the strategy.  

 

3. Stay Disciplined with Your Spending and Save As Much Money as Possible

Next, you need to review your spending. In addition to investing strategically, it’s important that you seek to minimize unnecessary expenditures so that you don’t inadvertently burn through your cash flow. If you can find ways to save, whether they are one or two significant cuts to your budget or a number of smaller cash-saving items, they could make a big difference.

This will help you build your emergency savings, giving you peace of mind in the event of a financial emergency. Unfortunately, half of Americans cannot afford a $1,000 emergency. If you can get a handle on your spending, you’ll minimize the effects of inflation and give yourself a strong financial footing for the future.

Some of the most common money wasters are unused gym memberships, unnecessary subscription services, and making only the minimum payments for high-interest rate debt. If you can, try to reduce spending while looking to pay off any high-interest-rate debt quickly.

 

4. Make Sure You Have a Good Mix of Stocks, Bonds, and Cash Investments

What makes for a good portfolio? Diversification with a focus on your specific goals. Diversification is so powerful since it offers the opportunity to maintain or possibly grow, your wealth while providing a reasonable amount of protection from major market crashes.

Stocks benefit from investor confidence. But when investors are feeling uncertain about the markets, they pour their money into bonds, which can cause bond prices to go up. This is great for bondholders. Cash can pay interest without taking on any significant risk at all.

Effective portfolios have the right mix of stocks and bonds, enabling you to protect your wealth, generate returns, and withstand the pressure that inflation has on different investments. The team of professionals making up our Linscomb & Williams Investment Committee spend a great deal of their time and research on formulating the right mix of investments given the current environment. Your financial advisor can help you maintain a portfolio that blends each asset class nicely.

 

5. Watch Interest Rates and Take Advantage of High-Yield Savings Accounts or Bank CDs

Bank interest rates are not keeping pace with inflation as it currently stands in 2022. However, since all consumers need to have some form of an emergency fund, why not place your rainy-day fund in an account that yields interest at a higher rate?

In an effort to control inflation, the Federal Reserve has raised interest rates three times this year (2022). This can make interest rates on new forms of debt like auto loans and mortgages increase. At the same time, it can also lead to higher bank account interest rates.

So, take a look at your bank’s offerings: Can you move some of your money into a higher-yielding bank account from a basic checking or money market account? Is there a CD with an interest rate you find appealing? Keep an eye on bank account interest rates and try to be ready for moving your money around to maximize your interest growth.

 

6. Complete an Insurance Review to Make Sure You Have the Right Coverage for Your NeedsComplete an Insurance Review to Make Sure You Have the Right Coverage for Your Needs

It’s a good idea to review your insurance coverage at least once a year. This helps to make sure your loved ones and important assets are adequately protected. As life events occur, your needs may naturally change, which can require your insurance coverage to adjust.

Insurance reviews can be a great way to stay on top of your insurance needs, discover if you’re under-protected, or check and see that you’re not overpaying in monthly premiums. You can also discover helpful bundles that may provide useful cost savings.  In our 50+ years of working with clients, we have observed that staying current on insurance reviews is an area clients often tend to let slide.

For example, the average annual cost of full coverage car insurance is $1,700 per year. Is this sufficient for your needs based on your number of cars, commute, and automobile use? Ultimately, periods of high inflation require you to think about your investments (and spending habits) a bit more strategically. 

The good news is that if you can find a way to reduce unnecessary spending and keep your investments on track, you can potentially preserve your purchasing power. This can mean emerging even stronger when prices stabilize again. Linscomb & Williams has the retirement planning Houston needs. Contact us today. 

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Lantz Bowman, CFP®

Lantz Bowman, CFP®

Lantz Bowman is a Director and Wealth Advisor for Linscomb & Williams.

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