Last week we covered what’s going on with inflation, and why it’s so high right now. We also covered the importance of making sure that inflation doesn’t have a negative impact on your retirement.
Since inflation is often underestimated when it comes to your retirement, I wanted to discuss 4 strategies that you could use to make sure that you have a comfortable retirement for 3 plus decades, without having to cut back in significant ways later on in your retirement.
1. Consider delaying Social Security
If you have enough money to live off of, this is a potentially great idea. For many people, social security grows around 8% per year that you delay from ages 62 to 70. In addition to that, Social Security provides an inflation adjustment every year so that your Social Security benefits keep up with inflation.
In 2022, the projected inflation-adjusted is set to be around 6.1%. Now most years it isn’t nearly that high, but inflation has been quite high so far in 2021, which is why the Social Security office is giving benefits such a boost.
Regardless, if you can delay your social security benefits, they will almost certainly increase above whatever the inflation rate is in that year (mainly because of that 8% per year benefit by delaying it).
2. Beware of annuities, CDs, and other low-yield investments
Some retirees worry that their biggest risk in retirement is losing principle. I disagree wholeheartedly!
Your biggest risk in retirement is that your purchase power gets eroded year over year so that when you are 15 or 20 years into your retirement, you cannot buy enough of the things that you need with the money that you have (even though you were able to do this when your retirement started).
Your biggest worry is that your investments don’t keep up with inflation.
When you invest in low yield investments like annuities, CDs, they either don’t adjust for inflation at all (annuities), or they offer a yield so low that inflation outpaces that yield (most CDs).
3. Keep a heavy allocation of Stocks vs Bonds
It’s hard (impossible!) for me to tell you how to allocate your investments in terms of stocks and bonds via this format.
What I can say, though, is that the higher percentage of stocks you have compared to bonds will in the long term be beneficial in helping you outpace inflation. The reason why is simple: over time, stocks have historically outpaced bonds, and by quite a lot.
Lastly, over that time period inflation was 2.9%.
Stocks were able to outpace inflation by over 3 times, while bonds and bills didn’t come close to that number.
And over the 3 plus decades that you have in retirement, what you really need to do is to make sure that your investments outpace inflation enough to make up for the distributions that you’ll be taking from your portfolio.
Which means that if you have too high a percentage of bonds/bills/low yield investments in your portfolio, you may be cutting into your purchasing power later in life, in your 70s, 80s, and 90s.
4. Don’t buy gold!
Yes, you’ve probably heard somewhere that gold is a great hedge against inflation.
Well, I’m calling BS on that claim.
Long term, it’s a terrible hedge. And I have to say, I’m a long-term investor. When I say long-term, I mean I am investing with 10 to 50 years in mind. Before you think that that’s too long of a time horizon for you, let me remind you that if you start your retirement in your 60s, there’s a pretty decent chance that at least one of you or your spouse will be alive in your 90s. So I think everyone has the opportunity to be a long-term investor.
Now if you think you can predict and profit off the short-term changes in markets and the economy, go for it. But all the evidence suggests that you won’t be successful at that.
So let’s go back to the long-term results of gold. In the year 1980, at the peak of our country’s only real brush with hyperinflation, at the end of the year, gold sold for $589.50/ounce, and the Dow Jones (a major US benchmark for stocks) sold for $963.99.
Today, gold is selling for $1,761.00 and the Dow Jones $34,000.
That means gold grew its value by 3 times, and the Dow Jones grew its value by 35 times.
So I don’t think more needs to be said about gold as a long-term hedge against inflation, or as an overall investment opportunity.
Now some of you may be saying, “Well Scott, what about the last year? I bet gold has done well with the inflation we’ve seen.”
Well, that hasn’t been the case. Let’s look at a gold index fund (GLD), created by State Street. Year to date (January to September 2021), the fund is down (-9.68%). And over the last 12 months, the fund is down -8.27%. And this is in the midst of inflation levels that we haven’t seen in decades!
So if you’ve felt that gold can help you beat inflation, I hope these numbers will help you reconsider.
Wrapping It Up
We’ve covered a lot today. We’ve got 4 really important things for you to do, or not to if you want to make sure that your investments are properly structured against inflation.
First, think about delaying social security. Second, limit (or eliminate) the money you have in low-yield investments like CDs and annuities. Third, keep a heavy allocation of your money in stocks. And fourth, don’t buy gold, despite what the late-night commercials tell you to do.
If you do those 4 things, you’ll be putting your investments in a place where inflation won’t have as harmful effect on your lifestyle, so that as you age, your lifestyle and spending power will be able to grow as well.
If you’ve like help making sure your investments are properly structured, I’d be happy to chat with you, and even create a one-page financial plan for you to ensure you can have a comfortable retirement. Just go to StartMyRetirement.US to find a time for us to meet.
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