Does inflation have you worried about retirement? Here’s what experts say to do

Inflation may have you worried about your retirement.

Prices have been rising on everything from food to housing. In April,
the consumer price index, which measures the prices of goods and
services, notched an 8.3% increase from the year-earlier period.

In fact, 70% of Americans are calling inflation “a very big problem”
for the country, according to a Pew Research survey.

Meanwhile, some older adults are choosing to put off retiring:
Thirteen percent of Gen Xers and baby boomers said they’ve postponed
or considered delaying plans to leave the workforce because of rising
costs, a survey from the Nationwide Retirement Institute found.

Add a volatile stock market to the mix and those saving for retirement
may start rethinking their investment plans.

Yet investing in equities is the best hedge against inflation, said
Tom Henske, a New York-based certified financial planner.

“One of the main reasons you invest is to protect your purchasing
power,” he explained.

The value of cash decreases with inflation. Your investments may also
be affected, but generally, equities have held up well against
inflation over the last three decades, a 2020 analysis by the U.S.
Bank Asset Management Group found.

With inflation still high and continuing volatility in the stock
market, here are steps you can take to protect your retirement
portfolio.

Keep contributing

If you aren’t experiencing a reduction in income, continue to
contribute to your retirement plan, said certified financial planner
Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg,
Maryland.

“With your employer-sponsored plan, you are taking advantage of
dollar-cost averaging,” she said.

That means you are investing your money in equal portions at regular
intervals, no matter how the market is doing. In essence, it reduces
risk but may not generate returns as well as lump-sum investing.

If you are over age 50 and can take advantage of a Roth 401(k), Roth
403(b) or Roth TSP (thrift savings plan), consider directing catch-up
contributions into the account. For 2022, that is a maximum of $6,500.
You pay tax on contributions, so you don’t have to pay when you
withdraw the money.

“Tax diversification is important,” said Cheng, a member of the CNBC
Financial Advisor Council. “Building a bucket of tax-free income in
retirement is definitely something to consider.”

Hold on to some cash

It’s important to have cash reserves in the event of an emergency. By
having a savings account separate from your investments, you don’t
have to tap into any equities or other assets if you need money.

Check your emotions

Getting caught up in the drama of a volatile market is easy and could
lead to emotional decisions that could potentially affect your
retirement savings. It’s best to check those emotions at the door.

If you are worried about your ability to keep your feelings out of the
equation, consider asset-allocation funds or target-date funds, Cheng
said.

Target-date funds essentially put your savings on autopilot, set to
adjust based on your targeted retirement date. An asset-allocation
fund has a diversified portfolio across different asset classes.

Be diversified

Your portfolio should be a mix of different assets, like stocks and
bonds, and the allocation should be determined by your risk tolerance,
time horizon, cash-flow needs, and taxes, Cheng said.

Bonds pay a yield for holding them until maturity. With bonds, be
diversified in terms of credit, quality, and maturity, she said.

Some of your fixed income can be in Treasury inflation-protected
securities. Like traditional Treasury bonds, TIPS are issued and
backed by the U.S. government. However, TIPS offers protection against
inflation because the principal portion changes with inflation, as
measured by the consumer price index.

Your portfolio should also include both growth and value stocks and
mutual funds or exchange-traded funds, Cheng said. In addition, you
should consider companies that pay dividends regularly which can help
weather volatility, she said.

“Large companies that have a long history of paying consistent
dividends each year have something to their advantage in an
inflationary environment: They can weather — and actually benefit —
from higher prices,” Cheng explained.

Then there are assets that are traditionally considered inflation
hedges, like gold and other commodities, as well as real estate
investment trusts. The decision to add them to your portfolio, and how
much, again depends on your time horizon, Henske said.

“The further away you are from needing the money, the more equity
exposure you have in your portfolio,’” he said.

The closer you get to retirement, you might build up some of your
hedges, like TIPS, gold, and commodities, Henske added. “You want to
do everything in moderation because you don’t have a crystal ball,” he
said. “We don’t know what’s going to happen.”

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