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How to Protect Your Retirement Savings from Inflation

Protecting Your Retirement: How to Protect Your Retirement Savings from Inflation

Protecting Your Retirement: How to Protect Your Retirement Savings from Inflation

Many conservative male investors are worried about their retirement savings eroding by record-high inflation. Many savvy investors have been researching inflationary-resistant physical assets like gold or silver as a way to protect your retirement and how to protect your retirement savings from inflation.

In this blog post, we’ll discuss what inflation is, how it causes damage to a retirement portfolio and some ways to protect yourself from rising inflation. We’ll also discuss the benefits of holding on to some cash and purchasing physical assets that are inherently inflationary resistant. Finally, we’ll provide you with a conclusion to this blog post.

Thanks for reading!

What is inflation, and how does it affect retirement savings?

Inflation is the increase in prices for goods and services.  Inflation decreases the purchasing power of money in an investment portfolio. It affects retirees on a fixed income by reducing the number of goods and services the retirement portfolio can purchase. Many retirees find it difficult to maintain their standard of living when the cost-of-living increases.

To offset inflation, the investment savings account should generate a higher return than the rising inflation rate. Unfortunately, many don’t consider inflation’s effects on personal finance until it’s too late.

You need to know that the higher the inflation rate, the more your investments must grow to keep up with higher prices over time. Even though your financial portfolio shows gains and a decent rate of return, the account’s value may have decreased.

Inflation burning through your retirement Money
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Inflation is a measure of the rate of change in prices.

Inflation is an important economic indicator that measures the rate of change in prices. Most countries aim to have a modest inflation rate. The United States, for example, sought to have an inflation rate of 2-3%. Above 2-3%, the Federal Reserve Chair would have normally increased interest rates to make money more challenging to obtain and start cooling off the market to prevent a massive erosion of savings or requiring adjustments to social security payments for individuals on a fixed income.

The Consumer Price Index (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services to track inflation increases. There are separate indexes for two groups or populations of consumers: CPI for All Urban Consumers (CPI-U) is the index most often reported by the national media. At the same time, CPI for Urban Wage Earners and Clerical Workers (CPI-W) is the index most often used for wage escalation agreements.

You can hedge against inflation with certain investments

When it comes to inflation, a good investment can protect your money from losing value. There are a few types of investments that offer this protection:

  • Stocks
  • Bonds
  • Cash
  • Mutual funds
  • Inflation Hedges
  • Real Estate
  • Physical Gold and other precious metals

Stocks, Bonds, Mutual funds, Cash

These first four types of investments are traditional staples for retirement planning and personal finance but usually don’t provide the best protection against market turmoil. While these are part of a well-diversified retirement portfolio, and except for cash, they have the propensity to keep pace with inflation as the market sees higher prices, these are subject to devaluation when the economy takes a downturn.

Inflation Hedges

Inflation hedges tend to be less desirable when the overall market is doing well. Investors tend to shy away from inflation, or recession-resistant assets is they usually don’t have the same high return on investment (ROI) potential as other assets. However, these are essential to personal finance retirement planning. Inflation Hedges can help preserve your purchasing power during economic downturns. Hedges are ideal when inflation rates are at record highs, as seen in 2022.

Real Estate

Real estate investments can help offset inflation, providing stability, increased equity, and income potential. It’s important to remember that real estate is not a guaranteed hedge against inflation and does come with risk.

Physical Gold and other precious metals

Gold is one of the original currency denominations recognized worldwide for its stored value. Financial advisers at large banks such as Well Fargo and Bank of America predict a massive increase in gold. Elites have used precious metals such as gold, silver, platinum, and palladium as natural hedges against inflationary risks in their portfolio.

It’s essential to have a diversified portfolio if you want to protect your money from the erosive effects of inflation over time. To diversify your portfolio means having assets like stocks, bonds, commodities, precious metals, and short-term investments in your retirement portfolio. These options provide some volatility, which is necessary for long-term returns.

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How can you measure the effects of inflation on your retirement savings?

To account for inflation, you should adjust your retirement savings plan. One way to do this is by investing in low-risk assets and/or buying physical precious metals assets, indexed mutual funds, or exchange-traded funds. Indexed mutual funds and exchange-traded funds allow you to diversify your investments so that if one asset goes down in price, the others will still be up.

Inflation will reduce the purchasing power of your retirement savings

As mentioned above, inflation is the rate at which the general level of prices for goods and services rises, and it eats away at the purchasing power of dollars over time.

Even a low inflation rate can significantly impact future retirement income if it’s compounded over many years. For example, if you retired in 1980 with a $100,000 nest egg and annual 3% inflation rates, by 2010, inflation would reduce your buying power to the equivalent of $40,340.

Inflation can be measured by Social Security and certain pensions and annuities; however, there are no perfect measures of its effects on individuals’ retirement savings plans. Many experts agree that investing in assets such as the ones listed above has the potential to keep up with inflation and is an excellent idea to include in the decision-making process. Several inflation-resistant assets include stocks or mutual funds, TIPS (Treasury Inflation-Protected Securities), real estate securities, gold, silver, palladium, and platinum.

Inflation will reduce the real value of your retirement income

Retirees have relied on the 4 percent rule. According to many experts who say it’s an outdated strategy, this approach may not work in coming market cycles and more prolonged than expected time horizons. Even Vanguard has published information pointing out some holes in the retirement income plan.

Inflation and higher prices will reduce the real value of your retirement income, so you need to be proactive and make changes to your portfolio.

According to the 4% rule, the retiree should start with 4% of the retirement portfolio’s initial value. This number is based on research that suggests a retiree can withdraw 4% of their initial investment each year and then add the inflation rate to this amount every year to offset inflation effects and maintain the standard of living.

What are some strategies for protecting your retirement savings from inflation?

Hedge with Commodities

Financial experts often refer to investments that protect your savings from inflation as hedges. Hedges are investments that protect your property from falling dollar values. Inflation hedges are a good idea as long as they are mainly composed of commodities and not solely stocks or bonds.

Commodities have an inherent value, meaning their prices tend to rise with inflation. The strategy is most effective when used to purchase physical goods with a high liquidity rate like gold, silver, palladium, and platinum.

Self-directed IRAs can hold gold and Silver in a retirement portfolio through a self-directed IRA. See the 5 best Gold IRA companies.

Investors can use commodities to diversify and reduce risk and make their investment more secure.

Invest in Treasury Inflation-Protected Securities

TIPS is a type of bond which adjusts their principal according to the Consumer Price Index (CPI). TIPS is a popular means to offer protection against inflation. The principal amount is guaranteed upon maturity of the bond, so investors can be confident that their investment will not lose value over time.

TIPS investments are not impacted by rising inflation and higher prices. As inflation rises, TIPS adjust the price (principal amount) to maintain their real purchasing value rather than increase yield. Preserving the purchasing power makes them an attractive option for investors in times of high inflation who will live on a fixed income.

Consider Real Estate

One way to help protect your retirement savings from inflation is to consider investing in real estate. There are several options for investing in Real Estate. A popular option without taking on large amounts of debt is to invest in a Real Estate Investment Trust or REIT. When a REIT becomes a public company, all property-related income becomes exempt from federal income tax. Many focus on one property type, such as offices, apartments, or industrial sites. Some concentrate on mortgages only, while others diversify into several property types at once.

REITs are a way to invest in real estate without the tenant and maintenance issues that often come with being a landlord. The paid-out dividends will increase over time, which is helpful for investors looking to protect their retirement savings from inflation.

Create a Self-directed IRA to hold non-traditional assets in your retirement account

A Gold IRA, a self-directed IRA, is an individual retirement account that allows you to hold physical assets like gold, silver, platinum, and palladium. These assets can provide stability during times of market volatility and can help to protect savings from inflation.

What are the risks of inflation for retirees?

Retirees are especially vulnerable to the erosive effects of inflation. Not only do they have a reduced fixed income, but they also tend to have higher medical care costs than other age groups.

Estimations show that health care spending for seniors of retirement age is three times more than for working adults. Given these factors, it’s clear that retirees need to take steps to protect their retirement savings from inflation.

Inflation can have a negative impact on your retirement plans

Inflation can have a negative impact on your retirement plans. Retirees are incredibly vulnerable to inflation because they are past their working years, where they can actively generate income for everyday expenses. All they have left to pay for higher costs is the money they’ve put aside for retirement.

Your retirement savings won’t last as long if inflation eats into their value.

Even for many investors who have diligently saved for retirement, the high inflation rate is actively destroying your wealth. Without active planning to protect your account’s purchasing power, the longevity of what you have saved will only last a fraction of the time.

As Medical advances continue, people, on average, are living longer, well into their 80s, 90s, or 100s, making it likely that retirees will need to survive off their income for more than 30 years.

Inflation can increase the cost of healthcare.

Health care costs have risen quickly, but inflation is asseverating the issue. Retirees need more money now than ever to allocate for unexpected medical costs that can potentially wipe out their savings.

With so many people struggling to cover health care expenses, where are some tips on how to help combat the trend:

  • Saving in a Health Savings Account (HSA). HSAs allow you to save money tax-free to cover qualified medical expenses.
  • Purchasing long-term care insurance. This type of insurance can help cover costs associated with long-term care, such as nursing home stays or assisted living facilities.
  • Retirement accounts also offer ways to plan for rising healthcare costs. For example, if you’re over 50, 401(k)s and IRAs allow you to save money more pre-tax by using catch-up contributions which can be used for healthcare expenses in retirement.

Finally, it is essential to remember that Medicare is not a comprehensive health insurance plan. Be sure to familiarize yourself with what your coverage entails once you retire and use that information to plan for the future.

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How can you adjust your retirement savings plan to account for inflation?

Why aren’t you saving enough for retirement?

Many factors contribute to why someone might not be saving for retirement. Some people may lack knowledge about the best ways to save for retirement, while others may struggle with budget constraints or live in poverty. Additionally, some people may believe they will have enough money growing up until they retire, leading them to delay starting a retirement savings account. Finally, some people may not have any extra money to set aside from their regular income and Social Security benefits.

A study by the Economic Policy Institute found that, in 2013, the median retirement savings for all working-age families was just $95,776.

There is also a false sense of security that Social Security benefits will fill the gap many Americans need to live comfortably. After all, they have been paying into the program their entire career. According to the Social Security website, Social Security payments for a retired worker average $1,539.68 per month, and $1,539.68 is hardly a livable wage.

Some elect to delay Social Security payments to collect “Delayed Retirement Credits” and increase the payments by 8%.

Another reason Americans are not saving enough is the rising prices of essential expenses, and health care expenses are eating into discretionary money. According to Barclaycard, consumers show signs of the cost-of-living squeeze, which sees almost half of all the UK card transactions. Barclays notes that virtually all non-essential expenses have declined, ranging from furniture to sporting entertainment.

Consider health care costs

When planning for retirement, it’s essential to consider all the potential costs that come with it, including the rising out-of-pocket costs for health care expenses.

According to Senior Living, the average annual cost of a semiprivate room in a nursing home is $94,900, and the average yearly cost of assisted living facilities is $54,000. Home health care homemaker services run about $59,495 per year.

What are some tips for minimizing the effects of inflation on your retirement savings?

#1 way to protect your retirement is to Check your emotions!

One of the best ways to protect your retirement savings is to check your emotions at the door! When the markets are in turmoil, it’s easy to let fear or greed take over and make decisions based on those feelings rather than reason. Instead:

  • Asset-allocation funds have a diversified portfolio and target retirement dates. Having a target retirement date means the account will automatically rebalance its holdings when the market takes a downturn, so you don’t have to worry about making knee-jerk decisions.

  • Target-date funds put your savings on autopilot, with adjustments based on your targeted retirement date. Putting savings on autopilot takes the emotion out of decision-making, so you can be assured that your money is working for you even when you’re not paying attention.

  • Follow your investment strategy.

  • When retirement planning, make a plan with a fiduciary, someone who is legally obligated to act in YOUR best interests, not their own. This way, you can be sure that someone is always watching out for your financial well-being – no matter what happens in the market!

Save Early and Often

One of the best ways to minimize the effects of inflation on your retirement savings is to save early and often. You can do this by:

  • Contributing to a retirement account, such as a 401(k) or IRA. These accounts have tax benefits and allow you to save money pre-tax.

  • Diversifying your portfolio across different asset classes, such as stocks, bonds, and real estate. Spreading more money across asset classes can help reduce volatility, improve returns, and insolate your wealth from adverse market events.

  • Open a Self-directed IRA with 3%-15% invested in physical products like Gold and Silver.

If you’re interested in learning more about investing in gold, Gold Hill Retreat has done extensive research on the top gold IRA companies

Review Your Withdrawal Strategy Regularly

When planning for retirement, it’s essential to have a solid withdrawal strategy in place. However, this plan may need to be revisited as time progresses and your circumstances change. For example, as mentioned above, the 4 percent rule may not be as reliable in the future – you may want to consider withdrawing 3 percent instead.

Additionally, if you are not comfortable with the CPI (Consumer Price Index), consider using the MSPRATI inflation index instead of relying on your retirement investments alone to ensure a steady income in retirement. And finally, remember that medical expenses will likely continue increasing. According to the Peter G. Peterson Foundation, Americans spend nearly $12,000 yearly on medical expenses. So make sure you factor these costs into your overall budget!

Keep an eye on the economy

It’s essential to be aware of the economy when retirement planning. The stock market has outperformed the CPI since World War II, so it can be a good idea to include stocks in your portfolio. However, remember that the market as a whole doesn’t always rise – it’s essential to plan your portfolio based on your individual needs. In addition, you should also include bonds in your portfolio for income and stability during market downturns.

Final Thoughts

While inflation does not cause your retirement savings to vanish overnight, Investors can not underestimate the damaging effects. Inflation causes make it essential for you to be prepared and aware of how best to mitigate inflation’s impact. Investing in assets such as precious metals like gold or silver bullion can ensure that your retirement funds are protected. To learn more about the best gold IRA companies, read our in-depth reviews to find out which company is right for you.