Preserving Retirement Funds During Inflation

The current economic environment has many investors concerned about their financial future. The combination of high inflation levels and the recent bear market has caused some to wonder whether they will have enough money to afford to live when they retire. However, financial professionals can alleviate their clients’ concerns by explaining the strategies with which they will need to approach their retirement portfolios.

Before approaching an investment strategy, investors must consider and understand their expenses. They must ask themselves how much they can afford to lose. If one can still sustain oneself off their salary, then their investment portfolio can afford to be a bit riskier. On the other hand, if a client is at a stage where they need to have a steadier income from their investments, playing it safe could be ideal.

What Are “Safe” Investments?

The most important thing to discuss with clients is that the definition of “safe” investments will be highly relative based on their individual circumstances. Older investors must approach their retirement portfolios differently from younger investors because their needs are entirely different — a significant loss to their retirement funds will impact them far more, and much sooner.

If a particular client is in the accumulation phase of their financial journey, the focus should be on improving their long-term growth. For investors in their twenties to fifties, ETFs and mutual funds that invest in equities are typically the way to go; equities have historically outperformed other investments and delivered returns that have beaten mounting inflation rates. When the future that a client is preparing for is farther out, this is generally the best place to start.

Consider the Length of Your Investment

Once your clients reach a point where they are living on their investments in retirement, rather than their income from an annual salary, it becomes crucial to consider the investment’s lifespan. As clients get older, it is critical to determine whether a “safe” investment entails no loss of principal funds, or if there needs to be long-term growth to offset inflation.

For the money that will provide a retiree with their income in the next 1-5 years, it is wise to take less risk, as a short-term loss could have catastrophic consequences. This is when money is best invested in options like bank CDs, fixed annuities, and short-term fixed income funds. Although these investments come with much lower levels of risk, they also come with substantially lower returns.

Conversely, with money that will be used in years 6 through 10, it makes sense to take on slightly more risk, and even more with money that will be used in years 11 and on. Because the inflation rate has been so volatile in recent years, the amount of money that one has today may not go as far one year from now, much less in 10 or 20 years. Just because a client is retiring soon doesn’t mean they don’t need their money to continue growing.

Where to Invest for Retirement

Asset classes like equities and real estate generally outgrow inflation. Because a company’s revenue should rise along with inflation, its stock price should also rise. As such, it is essential to advise clients to stay invested in stocks and not sell their equity unless absolutely necessary.

Real estate is also a strong investment because it is generally considered one of the most stable asset classes. After all, people will always need a place to live, so the demand for real estate is unlikely to drop. Likewise, as inflation occurs, so do rent prices, allowing the investment to continue to gain value despite mounting inflation.

Preparing for financial independence in retirement is a bit of a science and an art. Since the money invested in retirement accounts could quite literally determine a client’s long-term survival when they can no longer work, responsible decisions must be made to secure it. If no risk is taken, a retirement portfolio may be unable to keep up with inflation, but if there is too much risk, retirees could be left without the money they need. The key lies in finding the right balance between the two.

John Shrewsbury, Co-Owner of GenWeath Financial Advisors.