Understanding Inflation and its Impact on Savings
Planning for retirement often includes putting money aside for future expenses, without considering the impact of inflation and the increased cost of goods over time. Therefore, it’s essential to remember that the value of money decreases with inflation, so the amount you’ll need for retirement may be more substantial than initially planned.
Invest in Riskier Assets
Approaching retirement, many people find themselves drawn to bonds due to their low-risk nature, but this could lead to a potential pitfall. The rate of return on bonds can be significantly decreased by inflation. Hence, savvier investments must include riskier assets like stocks, which can yield higher returns that can offset the impact of inflation.
Diversify Your Stock Investments
However, investing in just any set of stocks isn’t guaranteed to combat inflation. Some businesses and sectors perform well during times of inflation, like those in the agricultural industry, while others, like retail, may experience difficulties. Therefore, diversification should be a key component of any stock investment strategy when planning for retirement.
Consider Treasury inflation-protected securities (TIPS)
Treasury inflation-protected securities are a great tool for overcoming inflation. Returns on these securities are tied to the Consumer Price Index, ensuring stability, even during inflation. This feature makes them particularly useful for investors on fixed incomes, like retirees.
Include Commercial Real Estate
Another effective strategy is investing in commercial real estate. It could be a significant boost to your retirement savings portfolio because its value often rises even when the stock market is buoyant. A real estate investment trust or mutual funds containing commercial real estate assets can be easy ways to harness this investment area.