Inflation's Impact on Your Retirement

U.S. households are currently facing the highest surge in inflation since the early 1980s. When it comes to day-to-day expenses such as groceries and utilities, the impact of rising prices is obvious and immediate. But what may not be as apparent is the effect that inflation has on your long-term financial goals, like retirement. As you seek to make sense about how inflation can impact your retirement, here are three things to consider.

1. Understand the “real” effect of inflation on your long-term goals

The recent acceleration in prices has pushed inflation to the forefront of many investors’ minds. But it’s important to remember that, even when inflation is at 1–2%, it can have a significant effect on your retirement portfolio. If inflation averages 2% over 30 years, your million-dollar portfolio gives you a lifestyle that is little more than half of what it does today. You would need a portfolio of just over $1.8 million dollars to live the same lifestyle as you do today with your million-dollar portfolio. Long-term inflation numbers are typically more stable and less noticed; however, the effect can be substantial over time, particularly for those whose income doesn’t adjust.

 2. Avoid sidelining assets

In an effort to slow the economy and tame inflation, the U.S. Federal Reserve has ratcheted up its benchmark Fed Funds rate. As a result, we’ve seen an increase in interest rates for fixed-income investments, more volatility in the stock market, moves higher in commodities, gold and other “safe haven assets,” and more investors moving to the sidelines until markets normalize. While these past two years have been unusual, we believe short-term inflation may settle, and the economy may get back on trend over the next several quarters. Further, stocks tend to move higher ahead of economic recovery. In times of uncertainty, it may be tempting to remove yourself from the market but staying invested — at a level that reflects your tolerance for risk — is important in our view. History shows the markets have bounced back after losing value, and it's likely for this to happen again should major dips occur in the future.

3. If you’re far away from retirement, consider stocks as a long-term hedge

Stocks have a mixed track record when it comes to inflation. Over the short term, a sudden spike in inflation can have a negative impact on stocks, as investors may anticipate that higher inflation will lead to higher interest rates and reduced consumer spending. Further, corporate profits and margins may deteriorate if they can’t pass along rising prices. Over the long run, however, stocks can be seen as a potential hedge against inflation. Since 1871 stocks have historically outperformed inflation and have done so more consistently than other asset classes.

Remember: Investing is a journey. Through global unrest, depressions, recessions, and pandemics, the setbacks of the day have not put an end to the stock market’s climb higher. Though uncertainties abound regarding inflation and higher interest rates, a longer-term perspective can help recenter your focus.

Reach out to a CU Wealth Management financial advisor for personalized guidance.

Our CU Wealth management financial advisors can create a plan catered to your unique situation and accounts for inflation in your retirement portfolio. If you have any questions or concerns about the current inflation environment’s impact on your financial goals, contact Steve Namy at steve.namy@ampf.com.

Source: https://www.ameripriseadvisors.com/steve.namy/insights/inflations-impact-on-your-retirement