Despite the fallout to investor’s portfolios, job losses, and the overall downward turn of the American economy during the recession, we have benefitted from relatively low inflation rates. While the US and other countries control monetary policy, there is never a way to avoid inflation after a recession; it’s part of the economic cycle. Borrowing and buying power become expensive and our dollar doesn’t go as far during a period of high inflation. We are already starting to see inflation creeping up- food costs, housing, durable goods, as well as the reaction of the stock market to impending inflation (and other factors). Remember how much a candy bar cost when you were a kid? That’s the perfect illustration of inflation; things overtime become more expensive.
How does inflation affect your portfolio as you enter retirement and can it withstand future inflation hikes? If you’re unsure, having a financial plan run with a high rate of inflation can give you an idea how your portfolio may be hurt.
Some investors have the misconception that once you retire, financial planning and keeping part of your portfolio in the stock market should stop. When you retire, you are no longer working or contributing toward retirement savings accounts and still need to generate income inside your portfolio. During retirement, it becomes even more critical to continue to monitor and restructure your portfolio so that it continues to make gains the remainder of your life. This includes being invested enough in the stock market so that your portfolio outperforms the inflation rate.
There are two things investors can do if they’re opposed to keeping their retirement portfolios in the stock market to adjust to inflation; cut back on what you buy or return to work so you can continue accumulating retirement assets. Even the best-constructed retirement portfolios are not completely ‘bullet-proof’ when it comes to inflation. Inflation is one of the unknowns in financial planning; we have no idea until we get there how it will impact us.
Contact our office for a meeting if you would like to visit regarding your retirement portfolio and inflation. Like everything else, inflation is an ever-changing beast that needs tending to throughout retirement planning and spending.