You’ve probably noticed lately that you’re paying more for groceries, gas, electronics, and—well, just about everything. In the past year, inflation has been two times the historical average, and many people are wondering how this will affect their long-term financial plans. You might be asking,
How will inflation affect my retirement? Will I have enough money to cover my regular expenses?
Should I change my investment strategy to keep pace with inflation?
What other risks might I be missing?
Inflation creates a ripple effect in our economy, so it’s important to know how it impacts your personal financial world. In this blog, we’re covering some important things you need to know about inflation and what you can do to maximize your portfolio.
What are some financial risks involved with high inflation rates?
The obvious, immediate impact of inflation is an increase in the costs of goods and services, but while this might put a strain on your current budget, it’s usually not a long-term concern.
Instead, the biggest issue we see is for conservative investors (typically those nearing retirement) because they generally have a bond-heavy portfolio, and those bonds have less purchasing power during periods of high inflation. Their rate of return doesn’t keep up with the rising costs of goods.
One of the strategies the Federal Reserve uses to suppress inflation is to increase short-term interest rates. This has a negative impact on bonds and bond funds held inside your portfolio, which leads to falling values in your fixed-income portfolio. Professional money managers can employ strategies that help reduce this risk, which is why it’s important to discuss your situation with an adviser.
Should I adjust my financial plan?
As long as inflation levels out in the next few years, it shouldn’t affect your long-term financial plan. Historically, we haven’t experienced higher-than-average inflation for long periods (10-plus years at a time). However, if it does remain above average for three to five years (or rises higher), it would be wise to revisit your financial plan, because the projected inflation rate used when you and your adviser originally created the plan might not be as accurate.
Either way, if you want a better chance of keeping up with inflation and increasing the value of your dollar over time, it helps to invest in asset classes that historically have kept pace with inflation, like equities, real estate, and commodities.
Know What You Own
There are a lot of things to consider during times of high inflation—will the Federal Reserve increase interest rates? How will that affect your portfolio? Is your purchasing power deteriorating? How does that impact your retirement distribution strategy?
When it comes down to it, the key is to know what you own and how it will react to inflation and rising interest rates. If you haven’t discussed your situation with an adviser, now is the time. Investment professionals can do an “X-ray” of your portfolio and conduct a stress test to see how it will respond to all types of situations. And if some adjustments need to be made, the sooner the better. Reviewing your plan with a professional now could mean the difference between a timely retirement and delaying your golden years because you’re waiting for your portfolio to recoup—don’t let a lack of preparation undermine your future financial goals.