Planning retirement? Here’s how to tackle inflation risk

Highlights

• A spike in inflation can pose serious challenges for retirees.
• Retirees require an income source which can easily adjust to a rise in consumer prices.
• Investment returns are critical for retirees since most retirees don’t add any fresh income to their bank accounts.

Inflation is one of the major challenges for retirees as it can easily lower the purchasing power of their income if not managed properly. Thus, retirees require an income source which can easily adjust to a rise in consumer prices.

It is therefore advised to properly plan one’s retirement to ensure the emotional and financial security of a person. One should carefully consider responsibilities and liabilities including loan EMIs, insurance premiums, and rents.

Investment returns are critical for retirees since most retirees don’t add any fresh income to their bank accounts. They can only benefit from owning Social Security benefits, the only inflation-hedged assets available to them.

How to curb inflation risk during retirement

Evaluation of investment strategy

The first and foremost step is to evaluate your investment strategy, keeping in mind the long-term impact of inflation. You should evaluate the effectiveness of your investment strategy by factoring in inflation in the next 10, 20 and 30 years. This way, you would be able to judge if your current strategy needs to change after retirement. Retirees should be fully protected from the adverse effects of inflation in the long term. 

Stock market investment

Stocks and real estate are good options to bank on when they are in the growth phase despite the fact that retirees should ideally allocate lower amount of their savings towards equities. A real estate investment trust (REIT) or energy sector stocks, are better positioned to see their value grow in line with the inflation rate. 

Some retirement portfolios focused on income generation generally have a certain small portion in equity holdings. However, this may require a sound strategy.
 

Financial products

Annuity is one financial product which provides retirees either a fixed inflation increase benefits or inflation protection based on an index. Protection against inflation is also provided by long-term care insurance. However, buying too much inflation protection can create an added cost and also lead to lower total returns.

Bottom Line

It is important to properly plan one’s retirement because it can adversely impact portfolio returns. Cutting down on spending, building a realistic retirement budget, and leveraging investments can help lower the impact of inflation.

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