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6 Strategies To Inflation-Proof Your Retirement Portfolio

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Initially considered “transitory” due to the economic re-emergence from the COVID pandemic, inflation now appears here to stay, at least for a while.

The consumer price index reached an annualized inflation rate of 7.9% in February, the highest in over 40 years. Understandably, many people are concerned about the effect of inflation on their nest egg, with 71% of retirement age investors worried that rising inflation will negatively affect their retirement savings.

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Strategies To Inflation-Proof Your Retirement Portfolio

While inflation can wreak havoc on retirement portfolios and decrease the spending power of your hard-earned dollars, there are steps you can take to fight back and protect your investments. Here are six strategies that can help inflation-proof your retirement.

  1. Adjust Your Asset Allocation

While it's always good to check in on your portfolio's allocation to match your desired returns and risk tolerance, an inflationary environment provides the perfect opportunity to re-evaluate your goals.

Bond prices typically move in the opposite direction of interest rates. The Federal Reserve often raises rates to combat inflation. Rising rates can hurt bonds prices, causing them to drop. Overexposure to bonds can be detrimental to your portfolio in an environment of rising rates.

Over the long haul, stocks have historically offered higher potential returns, but with the trade-off of added volatility. If you have more time before retirement and your risk tolerance allows for it, consider increasing your stock allocation to give your portfolio a chance to outpace inflation.

Real estate is another asset to consider adding to your portfolio. On average, real estate has acted as a hedge against inflation over the last 100 years or more, keeping pace with the inflation rate or even beating it by a few percentage points. While owning property directly is one way to invest in real estate, if you have no interest in becoming a landlord, other investment vehicles, such as Real Estate Investment Trusts (REITs), trade on the market like stocks.

  1. Reduce Floating-Rate Debt

Fixed-rate debt is often a benefit in an inflationary environment, as you are paying back current debt with cheaper dollars in the future. However, floating-rate debt, such as adjustable-rate mortgages, credit cards, or student loans, can see interest rates, and thus payments, rise significantly.

If you are nearing retirement or on a fixed income, increased interest rates can quickly cause your debt payments to balloon into an unsustainable portion of your budget. Even if you are early on in your career, any additional money spent on debt payments is money that cannot be saved and invested for future retirement.

Prioritize paying down high-interest debt first, such as credit cards or personal loans. If it makes sense, you can also consider converting floating rate debt into a fixed rate by refinancing your home.

  1. Consider Inflation-Protected Securities

While bond prices can be hurt during an inflationary spike, certain types of bonds are designed to hold their value against inflation. Two main ones are Treasury inflation-protected securities (TIPS) and Series I savings bonds (I Bonds).

TIPS are designed to be indexed to the inflation rate to maintain purchasing power. The principal amount increases when inflation rises and decreases when it falls. They can be bought and sold on the secondary market and are considered liquid investments. I Bonds perform a similar function, but their structure is slightly different. I Bonds are not marketable securities and can only be redeemed through the Treasury. They accrue a set fixed interest rate and a variable rate based on inflation calculated semi-annually. As of this writing, the initial rate on new I Bonds is a hefty 7.12%.

  1. Optimize Social Security Benefits

If you are nearing retirement age, consider delaying Social Security retirement benefits as long as possible. If you have investments, you can draw from to pay your expenses in the first few years of retirement, delaying Social Security until age 70 can increase your monthly payment by 24 - 32%, depending on when you were born.

Unlike 401k or IRA plans, Social Security is a guaranteed income stream that is adjusted annually for the cost of living. You can significantly increase your monthly income during retirement by waiting to start collecting this benefit. Waiting to collect Social Security can be a powerful tool to inflation-proof your retirement.

  1. Revisit Your Budget

For investors nearing retirement, inflation can cause significant anxiety because as prices rise, pulling out more of your retirement funds early on can affect the longevity of your portfolio.

Every little bit helps when it comes to reducing spending. Look for areas of discretionary spending in your budget where you may be able to cut back in the short term to avoid putting too much pressure on your investments to outperform. Perhaps you can delay your next vacation or drive your current vehicle a few years longer. If you haven't already, consider cashback apps and credit cards that offer 1-2% back on every purchase, giving you a slight discount every time you buy groceries, gas, and other necessities.

  1. Increase Your Savings Rate

If inflation makes daily life more expensive, you might think it would be impossible to increase your savings rate. However, there are several things you can do to sock away extra retirement savings.

It is easier to make extra money than decrease expenses. During times of rising inflation, average wages are increasing. Take advantage of every opportunity in your current job to advocate for yourself and keep your pay in line with the market. If you have come to a dead end at your job, consider applying to other positions. Many companies raise entry-level pay or give signing bonuses to new hires.

Another popular option to earn more is to get a side job, whether consulting in your field of expertise or something completely different like tutoring online or delivering food in the evenings and weekends.

No matter what avenue you choose to increase your savings rate, the more you can contribute to your retirement accounts, the longer you give your savings time to grow and compound.

Don't Fear Inflation

While the U.S. is currently experiencing its highest level of inflation in four decades, there are still proactive steps you can take to secure your retirement portfolio. You can be better prepared to weather the inflationary storm and keep your retirement plans on track by having appropriate inflation-hedging investments and keeping some flexibility in your spending plans.

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