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How to Plan for Inflation in Retirement

You want to save money to set yourself up for a comfortable, stress-free retirement.

But as the inflation rate continues to rise, your retirement savings could take a hit. Depending on what type of investments you have, inflation might affect your portfolio, causing your money to stretch. Will inflation make your retirement daydreams disappear?

The good news is that strategic investing may give you a better chance of staying stable even as the market fluctuates. Here’s what you need to know and how you may set yourself up for success with your retirement savings—even with the potential of inflation.

What is inflation?

The simplest inflation definition is that inflation is the rate of increase in prices over a given period of time. According to Trading Economics, the annual inflation rate in the U.S. accelerated to 7.5% in January of 2022. This is the highest inflation rate the country has seen since 1982. Costs for gasoline, food, health care and more are all going up.

Disruptions in the country’s supply chain may also influence inflation.  If there is too much money chasing too few goods, the price of products and services may go up.  In addition to affecting the cost of living, inflation also influences interest rates. When the Federal Reserve wants to get inflation under control, they may do several things, one of which is to raise interest rates.  This is meant to slow down an overheated economy.

The risk of inflation rate and retirement savings

There are several risks that might affect your savings in retirement. Health care costs might run higher than you think; Medicare often doesn’t cover everything you need. Outliving your savings is also a very real possibility. And the inflation rate can affect your retirement savings, too.

As the inflation rate changes over time, if your income is not going up at a similar rate, you might not be able to afford everything you need. If you are on a fixed income, inflation may have a greater affect on how you live in your retirement.  If the price of the items you need goes up, and your income is not keeping pace, you may not be able to meet these costs with your fixed retirement income, you may struggle to cover your expenses.

The bottom line: There’s a good chance that your retirement savings might not go as far in the future.

Mitigate the risk of increased interest rates

The best way to mitigate the risk of inflation is to plan ahead. Strategically selecting certain types of investments may help you be better prepared for potential rising costs. Work with a Financial Representative to help you determine what type of investment might help you mitigate inflation risk, but also fits your risk tolerance and time horizon.  A Financial Representative can show you different types of investments that may potentially meet your needs.

Choosing the right kind of investment may help you mitigate the effects of inflation on your retirement savings.

Bonds vs. stocks 

Often, bonds are not able to keep up with rising interest rates caused by inflation. Bonds are interest-bearing instruments. This means bond prices may move in the opposite direction of inflation. When inflation causes interest rates to go up, bonds fall in value—something that’s called interest rate risk. When inflation goes down, bonds may rise in value.

The degree to which inflation affects your retirement savings will depend on how your savings are set up. If bond mutual funds or other fixed income investments are a major source of your retirement income, rising inflation may cause your savings to run out too soon.

To help you determine if a bond investment or a stock investment is right for you, there is no right answer for everyone.  A Financial Representative can show you how different portfolios may help meet your goals. Past performance is no guarantee of future results, but stock investments may help you stay in front of inflation over long periods of time.

If you want to move forward with a bond other fixed income portfolio, selecting bonds with a shorter duration may reduce interest rate risk. The duration of a bond describes how sensitive that bond is to interest rate changes. This number is expressed in years.

Typically, a bond with a long duration is more sensitive to rising interest rates, and its price will decline greater than a bond with a shorter duration.

Diversify your investments

Since the inflation rate in 2022 is continuing to rise, it’s a good idea to diversify your portfolio, investing carefully so inflation will affect your retirement as little as possible. For example, inflation protected bond mutual funds may provide you with an income that may not be as sensitive in a rising interest rate environment.

Traditional investment categories for retirement include stocks, bonds, and cash. Fixed indexed annuities (FIA) are a contract between investors and insurance companies that are issued by the insurance company and may serve as an alternative to bonds.

Keep in mind that the best type of investment for you will shift and change depending on your age and how close you are to retirement. As you near retirement age, your risk tolerance will likely change. This means you might need to focus more on capital preservation and income.

How to plan for inflation in retirement

Before you make your final decisions on where and how you’d like to save and invest, consider your situation and your lifestyle goals. How long will it be before you retire? What are your current financial needs? What kind of income do you need or want in retirement?

These are all important questions to ask to guide your decisions. If you would like some help figuring things out, a Financial Representative from Bankers Life Securities can help you navigate investment options and help you to make these difficult decisions for your retirement. Learn more about our services here.

This material provides general information about the described insurance product(s) for educational purposes only. This is not intended as investment advice or to recommend the insurance product(s).

Bankers Life Securities, Inc., Bankers Life Advisory Services, Inc. and their representatives do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors.

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