Ways Inflation Might Affect Your Retirement Planning Efforts

Ways Inflation Might Affect Your Retirement Planning Efforts

23 Dec 2021

Inflation has reached a 3-year high, meaning the money you have saved and invested for retirement may be losing value with each passing day.  A dollar simply does not buy what it did 5 or 10 years ago.  

It is awfully disturbing to learn the Federal Reserve has hiked the M2 money supply more than 20% since the beginning of 2020.  

Be cognizant of ever-increasing inflation, plan appropriately with the guidance of the fee-only, fiduciary  CERTIFIED FINANCIAL PLANNER™ Professionals at McGervey Wealth Management, and you may rest easier knowing the ongoing devaluation of the USD is not sabotaging your retirement nest egg.


Worried about inflation? Contact McGervey Wealth Management and get some inflation-fighting tips!


Recognize the Threat of Inflation and Plan Accordingly

Inflation is taking a sizable chunk out of each current retiree’s financial nest egg, meaning it has the potential to do the same to your growing egg, possibly making it difficult for you to retire as scheduled.  According to the LIMRA Secure Retirement Institute, 1% inflation across a period of two decades will eat away at more than $34,000 of a retiree’s benefits.  

Consider the Prospect of Spending Less in Retirement

Though no one wants to envision golden years in which they remain at home watching TV, surfing the web, and reading, you might end up with that exact retirement lifestyle if you don’t plan for the impact of inflation. Wealth management strategies that are designed to help you invest and save in accordance with economic cycles including recessions, bull markets, inflation, reflation, stagflation, and deflation may provide the best outcomes.

If inflation continues, your purchasing power may decline during your golden years.  Even if inflation declines to a lower level, you are still likely to have less purchasing power in your golden years as retirees typically spend on services that increase in cost.  As an example, retirees spend a significant sum of money on healthcare, a service that continues to significantly increase in price.  

You can offset the impact of inflation by increasing your savings and investment rate while still working.  An alternative approach is to downsize your home to reduce your housing expenses and redistribute the money saved to the ever-increasing overarching cost of living.

Does Your Portfolio Include Securities Protected Against Inflation?

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If you own stocks, ETFs, and/or mutual funds, you might be on the right track in the ongoing battle against inflation.  However, your portfolio should also contain some securities that specifically protect against inflation.   

This approach shifts client funds toward specific classes and sectors as the economy changes, regardless of whether the market is bullish, bearish, or in-between.

Park your money in Treasury Inflation-Protected Securities, typically referred to with the acronym of TIPS, and you’ll rest easy knowing these investments have the full backing of the federal government.  TIPS investments’ face value increases across posterity in unison with the rate of inflation.  The only downside to TIPS is the fixed negative interest rate, meaning it is subtracted from the investment’s face value as interest is calculated.  

TIPS maintain pace with inflation yet it does so with 0.5% subtracted in periods when interest rates are low.  In other words, you’ll lose a small amount of money as inflation continues yet TIPS investments may still be superior to losing a significant sum of money by leaving your money in a bank savings account that gradually deteriorates in value as a result of ongoing inflation.

An Investment in Real Estate Might Offset Inflation 

The money you have saved in the bank will gradually decline in value if inflation continues.  Though money in bank savings accounts gradually increases in value as a result of interest accumulated, this interest rate is unlikely to match the rate of inflation.  Real estate tends to increase in value, largely because we can’t make any more land and the population continues to increase with each passing year.  Real estate also tends to surpass the rate of inflation across posterity as housing costs are a component of inflation.  

Furthermore, historical trends show real estate has increased in value at a rate faster than inflation, providing concrete proof that the addition of a new home, apartment complex or even a plot of land may help your portfolio offset the impact of inflation both in the short-term and the long-term.  

Though real estate will prove volatile similar to the stock market, most people buy and hold properties for the long haul, meaning the ebbs and flows of the market will likely average out to a significant net gain.

Strategically Alter Your Retirement Investments 

Economists agree that inflation is likely to continue through 2021 and possibly extend into the years that follow.  You can protect your retirement money across these years by investing in securities that provide a higher yearly rate of return, ultimately beating out the rate of inflation so your nest egg does not lose value. 

Investments with a comparably high yearly rate of return tend to be volatile yet such volatility is a risk inherent to investing with a strategy designed to outpace inflation.  Accept the fact that the elevated risk of these securities will result in some down years, also recognizing there will be high-return years mixed in.  

Above all, don’t lose sight of the market’s bullish long-term trend.  Stocks and other securities tend to gain significant value as time progresses, meaning investments with elevated risk are likely to gain considerable value when held for years and decades.

The fee-only fiduciary CERTIFIED FINANCIAL PLANNER™ Professionals at McGervey Wealth Management will help you sidestep retirement investing traps amidst inflation including long-term investments that have a comparably low rate of return.  

If inflation continues, investments with a nominal return won’t help you reach your target financial goal in accordance with your retirement timeline.  Though low-risk long-term investments will provide steady returns, they might not outpace inflation, meaning your money won’t work on your behalf, ultimately forcing you to spend that many more years in the workforce before retirement. 

At McGervey Wealth Management, we get to know you on a personal level and keep things simple, using common language everyone can understand. To learn more about our portfolio management techniques and how higher inflation might affect your retirement planning contact us today.

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More About the Author: E. Michael McGervey, CFP®, CRPC®

Mike is passionate and skilled at helping clients solve complex financial challenges. He’s known for his thoughtful communication, educational approach, and exceptional customized service. Mike has been a sought-after source for financial television, magazines, and newspapers looking for insightful analysis. His expertise has been featured by CNBC, FOX Business and...