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| Outsmarting Inflation: Strategies for Protecting Your Retirement Savings |
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Inflation has always been a source of concern for those approaching or already in retirement. According to a recent survey by the Society of Actuaries, inflation is now the top retirement concern for pre-retirees and retirees, beating out "affording long-term care" and "affording adequate healthcare" for the top spot.
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The fears are somewhat justified. For instance, let's say you're a 30-year-old making $50,000 a year and plan to retire at 65. Using an annual inflation rate of 3.2%, you would need $150,577 at age 65 to match the purchasing power of your current salary. At age 85, you would need a whopping $282,718–all thanks to inflation.
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Unfortunately, most people fail to factor in inflation when planning for retirement. That's because inflation is a fairly insidious force. It's a little like rust. By the time you realize that the underbody of your car looks like a piece of Swiss cheese, there's very little you can do to reverse the damage.
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So what can you do to help protect your retirement savings from the ravages of inflation? According to investment experts, you should consider the following:
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1. Save More
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The most obvious way to inflation-proof your nest egg is to save more. By saving more, you'll be able to leverage the benefits of compound interest–which can quickly increase the size of your nest egg over time. That's because you'll be earning interest not only on the principal, but also on any accumulated interest.
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2. Delay Retirement
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If you are fast-approaching retirement and are concerned that inflation is eating away at your savings, you may want to delay retirement by a few years to increase your financial cushion. Alternatively, you may want to work part-time in retirement to extend the life of your nest egg. Another reason to delay retirement is that people are living longer and thus need to save more to ensure they don't outlive their assets.
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3. Invest in Stocks/TIPS
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Many experts suggest investing in securities that are less prone to loss during periods of high inflation. Those securities include such things as stocks and Treasury Inflation-Protected Securities (TIPS), which are federally backed bonds whose value rises according to inflation. Conversely, you may want to reduce the amount allocated toward fixed-return investments such as bonds and CDs, which don't perform as well during high inflationary periods.
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4. Diversify your holdings
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It's always smart to diversify your investments–but it makes even more sense during times of high inflation. That's because some industries and investment vehicles are more vulnerable to inflation than others. The real estate industry, for instance, can be hit hard as mortgage rates climb during periods of high inflation. In addition, during periods of high inflation consumers often cut back on non-essential expenses, which can wreak havoc on industries such as entertainment and retail.
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5. Budget for inflation
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There are a number of good online calculators that can help you determine how inflation will impact your savings. Many experts suggest using an annual anticipated inflation rate of 3% when using these calculators. That's because inflation during the past 100 years has increased on average of only about 3.2% a year. That said, there have been periods in recent history in which the average inflation rate was in the double digits. For example, the average inflation rate in 1980 was 13.58%.
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The lesson here is that you can win the battle against inflation. For those who have the luxury of many more decades to save, it takes a little bit of planning and the adoption of smart investment practices. For those who are closing in on retirement and are concerned that their savings may not hold up if inflation rates increase, it may require a slight adjustment to their retirement plans and some belt tightening.
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Inflation's Impact
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The following shows how a 3.2 percent inflation rate would eat away at $100,000 in savings over time.
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| 0 yr |
$100,000 |
| 5 yr |
$85,428 |
| 10 yr |
$72,979 |
| 15 yr |
$62,345 |
| 20 yr |
$53,260 |
| 25 yr |
$45,499 |
| 30 yr |
$38,869 |
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