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Inflation can worry you about your retirement.
Prices have risen on everything from food to housing. In April, the consumer price index, which measures the prices of goods and services, registered a 8.3% increase of the period of the previous year.
In reality, 70% of Americans call inflation a “very big problem” for the country, according to a Research bench investigation.
Meanwhile, some seniors choose to postpone his retirement: Thirteen percent of Gen Xers and baby boomers said they had postponed or considered delaying their intention to leave the workforce due to rising costs, according to a survey by the National pension institute found.
Add to that a volatile stock market and those saving for retirement might start to rethink their investment plans.
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Still, investing in stocks 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 in general, stocks have held up well against inflation over the past three decades, according to a 2020 analysis by US Bank Asset Management Group.
With inflation still high and stock market volatility continuing, here are steps you can take to protect your retirement portfolio.
Keep contributing
If you don’t experience a drop in income, keep contributing to your retirement plan, a certified financial planner says. Marguerite ChengCEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
“With your employer plan, you benefit from purchase average,” she says.
This means that you invest your money in equal shares at regular intervals, regardless of how the market is moving. Essentially, this reduces risk but may not generate returns as well as a lump sum investment.
If you’re over 50 and can benefit from a Roth 401(k), Roth 403(b), or Roth TSP, consider making catch-up contributions to the account. For 2022, this represents 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 Council of Financial Advisors. “Building a bucket of tax-free retirement income is definitely something to consider.
Save some money
It is important to have cash reserves in case of an emergency. By having a separate savings account from your investments, you don’t have to dip into stocks or other assets if you need cash.
Check your emotions
It’s easy to get caught up in a volatile market and it could lead to emotional decisions that could affect your retirement savings. It is best to check these emotions at the door.
If you’re 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 target retirement date. An asset allocation fund has a diversified portfolio across different asset classes.
Be diverse
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Your portfolio should be a mix of different assets, like stocks and bonds, and allocation should be determined by your risk tolerance, time horizon, cash flow needs and taxes, Cheng said.
Bonds pay a return to hold them to maturity. With bonds, be diversified in terms of credit, quality and maturity, she says.
Part of your fixed income may be in Inflation-protected Treasury securities. Like traditional treasury bills, TIPS are issued and guaranteed by the US government. However, TIPS provide inflation protection because the principal part 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. Additionally, you should consider companies that regularly pay dividends, which can help deal with volatility, she said.
“Large companies that have a long history of paying consistent dividends every year have something to their advantage in an inflationary environment: they can withstand – and in fact benefit from – higher prices,” Cheng explained.
Then there are assets that are traditionally considered inflation hedges, such as 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 money, the more equity exposure you have in your portfolio,” he said.
The closer you get to retirement, you could 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 will happen.”
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