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Highlights
- Inflation is one of the major factors to consider while designing an investment portfolio.
- Retirees’ investment portfolios generally do not have any inherent inflation adjustment.
- Every retiree should consider inflation as a hidden fee being charged each year.
Inflation stands out as one of the most critical factors worth considering while drafting a successful retirement investment portfolio. And inevitably so, because inflation jacks up the cost of housing, groceries, gas, insurance, and many other essential items.
So, retirees should consider inflation as a hidden fee that's charged to them each year. It may not directly reflect in the expenditure statements, but in terms of what can be purchased with their dollars.
It is critical to have a successful retirement plan up your sleeve, especially in current uncertain times when inflation is eating into the real value of investments and adversely impacting returns.
How to curb inflation's impact on retirees’ investment portfolio
Retiree investors are considered most sensitive to inflation since their investment portfolio incomes generally do not have any inherent inflation adjustment. The only inflation hedged benefits can be availed through Social Security schemes. On that note, let us look at a few points to keep in mind while trying to shield your retirement portfolio against ill-effects of inflation.
Choose an investment with a long-term inflation outlook in mind
The first and foremost is to adopt an investment strategy along with the retirement income plan to assess if it can fully protect you from the adverse effects of inflation after retirement. It would let you know if your current investment strategy needs to be changed post retirement. Experts generally advise to factor in inflation for the next 10, 20 and 30 years.
Go for a balance of equity and debt
While stocks offer much higher returns than any other financial asset in the long term, most retirees may find equities risky. However, dividend stocks might be good options as they can offer steady income over time.
The other option is to invest in real estate investment trust (REIT) or energy sector stocks. These are also better positioned to see their value grow in accordance with the inflation rate. Investment in equities could be balanced with more conservative options including debt, since these are more predictable and offer stable returns.
Heard of bucket strategy?
A bucket strategy is about dividing the savings into three buckets, so that one can invest aggressively at an older age. It also covers the risks emanating from a short-term liquidity crisis. The three buckets are:
Short-term funds: Those nearing their retirement could hold a cash balance high enough to cover their living expenses for a couple of years.
Medium-term funds: You can use this bucket to invest in high-quality bonds, stable value funds, and blue-chip stocks. These funds should be adequate to cover the living expenses for the next 10 years.
Long-term funds. You can invest in growth stocks depending on your risk tolerance. A properly designed short-term and medium-term buckets properly could help you to tackle a 10-year window of uncertainty.
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