Tips to Inflation-Proof Your Retirement Plan

Because you work hard for your money, you should be able to fund your lifestyle both now and in the future. However, inflation impacts the amount of money you will need to set aside to provide your desired standard of living during retirement.

Fortunately, you can take steps to inflation-proof your retirement plan. The following strategies can help.

Reevaluate Your Investment Portfolio

Revisit your investment portfolio and asset allocation to determine whether they still meet your risk tolerance and desired rate of return. Keep in mind the following about stocks and bonds during periods of high inflation:

• Stocks offer higher potential returns than bonds, which can help your portfolio outpace the rate of inflation.

• Because stocks tend to be more volatile than bonds, consider holding more stocks to take advantage of potential higher returns.

• When interest rates increase, the cost of bonds decreases, and vice versa.

• Avoiding overexposure to bonds during periods of inflation helps protect against their decreasing value.

Create a Bond Ladder

If you want to maintain a set portion of your portfolio in fixed income, consider a bond ladder:

• Purchase a series of bonds equally divided across different maturity dates.

• When one bond matures, reinvest the proceeds into a new bond that matures at the end of the ladder.

For instance, a laddered portfolio might include bonds maturing in 2027, 2028, 2029, 2030, and 2031. When the 2027 bond matures, use the proceeds to purchase a bond maturing in 2032.

Investing and reinvesting in a bond ladder enables you to take advantage of potentially higher interest rates without locking into a long-term investment. Mixing short- and long-term maturities typically provides consistent yields during market volatility. Keep in mind that the risk of default or of not receiving adequate yield to meet your needs may apply.

Consider Purchasing Real Estate

Real estate investments typically do well during periods of inflation. Landlords usually pass along higher costs to their tenants.

Alternatives to investing in rental properties include real estate investment trusts (REITS). These companies own and manage real estate, such as apartment or office buildings, retail spaces, and hospitals. They generate income by collecting rent, then pass part of the profits to shareholders. 

Look into Treasury Inflation-Protected Securities

Treasury inflation-protected securities (TIPS) are U.S. government-issued bonds:

• You can buy TIPS from the U.S. Treasury, or purchase shares of a mutual fund or exchange-traded fund invested in them.

• The principal value of TIPS is indexed to the inflation rate.

• When inflation rises, the principal value is adjusted upward, and the coupon payment increases.

• When inflation falls, the principal value is adjusted downward, and the coupon payments decline.

Reduce Your Spending

When you begin retirement, drawing down your investments faster than planned can significantly impact your savings for years. Therefore, find areas of your budget where you can reduce your discretionary spending for the short term. Avoiding significant expenses for a few years, such as an international vacation, can provide a substantial amount of money to live on.

*This information is for educational purposes only.

How are you inflation-proofing your retirement plan? Let me know in the comments!