Inflation and Your Retirement Portfolio

September 29th, 2006  |  Published in General

While you’re still gainfully employed, inflation wasn’t never really much of a concern because you always figured it would be taken care of by your annual salary increases (which on the whole is generally true). However, once you enter retirement and begin drawing down your retirement assets, inflation becomes a much more significant issue because in order for you to keep up, your investments must appreciate at a rate that exceeds inflation. If your assets don’t, then you are in effect losing money each year… just for living.

So, how do you combat inflation? You should consider putting part of your retirement portfolio into an investment that is baselined against inflation in the first place. For example, if you put a portion of your retirement assets into a Treasury Inflation-Protected Securities (TIPS):

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

One of the big arguments against a fixed-rate annuity is inflation. If you purchase an annuity that pays out a set amount year after year, you’ll find that the inflation will slowly erode the purchasing power of that payout. For that reason, experts typically warn against putting too much into a fixed rate annuity because runaway inflation could leave you looking for work again.

  

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