Key Points
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Many people don’t understand how much of a problem inflation can be in the context of retirement planning.
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It’s important to set yourself up to beat or keep up with inflation once you stop working.
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The right investment portfolio could make a huge difference in that fight.
Many people spend years planning for retirement and the obvious financial risks that come with it — stock market downturns, healthcare expenses, and the possibility of Social Security benefit cuts. But one of the biggest threats to retirement may be less obvious and equally problematic.
That threat is inflation. Even when inflation levels are moderate, higher prices can steadily erode retirees’ buying power year after year.
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The bad news is that inflation isn’t a problem that’s going to go away. The good news is that with the right approach, you can set yourself up to beat or at least keep pace with it.
Lean on the right investment mix to fight inflation
A lot of people are quick to shift into a conservative investment portfolio when they retire. And after working so hard to build retirement savings, that makes sense to a degree. You don’t want to see your IRA or 401(k) wiped out by a stock market downturn.
At the same time, if you invest your retirement savings too conservatively, your portfolio may not generate very strong returns year after year while you’re living off of it. And that could make it harder to keep up with rising costs.
The solution? Don’t totally unload your stocks in retirement. Instead, aim for a balanced portfolio that’s a mixed of stable assets, like bonds, and growth-oriented assets, like stocks or the right ETFs (exchange-traded funds).
If you maintain a portfolio that’s about 50% stocks and 50% bonds, the bonds can provide ongoing income. At the same time, the stock portion can not only potentially generate dividend income for you, but also deliver returns that outpace inflation and allow you to maintain your spending power. And if the idea of having a moderate stock allocation makes you nervous, you could always boost your cash reserves for more peace of mind.
It’s generally a good idea to have about one to three years’ worth of living expenses in cash during retirement. If four years’ worth helps you sleep better at night knowing a large chunk of your portfolio is in stocks, there’s nothing wrong with that.
Don’t let inflation wreck your senior years
Investing wisely isn’t the only thing you can do to combat inflation. You can also employ strategies like delaying Social Security for boosted checks and reevaluating your spending habits regularly. You might also decide to work part-time for more income.
The key, either way, is to plan for inflation and understand the threat it poses. The sooner you recognize that, the sooner you can work on building a strategic portfolio designed to make inflation less of a problem.
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