What Happens to Your Retirement Savings When Inflation Surges
Most retirees expect inflation to increase by 2% each year, since that is the average rate historically. But when inflation rises to 9% as it does in 2022, retirees could be caught off guard. While higher cost of living adjustments can help, Social Security benefits can’t always keep up.
Stocks and bonds lose value amid high inflation in 2022, but gold and other commodities appreciate. Inflation is not always low, and preparing for a year of high inflation can reduce your losses.
What inflation does to a retirement portfolio
A higher rate of inflation raises bond yields, which is good news if you’re shopping around for new bonds. However, higher yields on new bonds also make existing bonds less valuable. That might be fine if you can’t hold your bonds until maturity, but if you have to sell your bonds, you won’t get as much money for them.
Stocks tend to struggle during high inflation as operating costs rise and consumers have less purchasing power. (However, equity that focuses on energy and wealth can do well in this area.)
The currency is guaranteed to lose value each year due to inflation, so it is never a substitute for economic uncertainty. Although its nominal value remains the same, its purchasing power will decrease. A $1,000 balance isn’t as useful now as it was 10 years ago. While cost of living adjustments will increase Social Security benefits, they often reduce inflation, especially in certain categories such as housing and health care costs.
How much to invest in gold – and in what form
Many experts suggest allocating 5% to 10% of your portfolio to gold and other assets designed to protect against inflation. You may not have a large enough hedge if your assets are less than 5% inflation-resistant, but an overconcentration in gold leaves you exposed to asset volatility. Although gold is considered a buffer against inflation and economic uncertainty, it still experiences strong price volatility.
Gold bullion is one solid option, and you can accumulate this asset in a tax-advantaged gold retirement account (IRA). However, gold exchange-traded funds (ETFs) are one of the easiest ways to get started and do not require physical storage. These ETFs are available for purchase in your regular taxable and retirement accounts.
What was taught in 2022 is saving for retirement
Stocks and bonds both fell in 2022, and that result taught many retirees that they may need something other than a classic stock and bond portfolio to protect themselves from all risk. Energy stocks, commodities, real estate and gold actually held up through 2022, showing investors a number of risk mitigation strategies that could reduce losses during a period of hot inflation.
Diversification across multiple asset classes designed for different economic cycles can provide your retirement portfolio with adequate hedges against inflation and uncertainty.
A simple self-assessment
Investors should review their portfolio regularly, such as twice a year, to make sure it is aligned with their financial goals. Those concerned about inflation should review what percentage of their portfolio is allocated to assets that benefit from inflation or that can remain stable.
Investors who focus heavily on stocks and bonds leave themselves exposed to higher inflation rates in the future. These people can benefit by accumulating gold, property and other inflation hedges. You don’t need to rebuild your entire portfolio, but having 5% to 10% of your portfolio in these types of investments could go a long way if we get another year like 2022.
