If you’re a retiree, here’s how to assess your portfolio’s inflation risk
Inflation can be scary for retirees . True, Social Security provides inflation increases in line with the consumer price index, or CPI . But any portfolio income, save allocations to inflation-protected bonds, isn’t inherently inflation-protected. And if inflation occurs early in your retirement, those higher prices will do more damage throughout retirement, potentially jeopardizing your…
Inflation poses significant risks for retirees, even though Social Security provides cost-of-living adjustments tied to the consumer price index (CPI). However, any income from a portfolio is not inherently protected against inflation. To evaluate inflation risk, retirees should consider three key questions: where their spending lies, how much of their income is inflation-adjusted, and where they are in their retirement journey.
Firstly, retirees should analyze their spending patterns. The CPI weights certain categories, like housing, more heavily than others, such as recreation and apparel. For instance, a retiree without a mortgage may have smaller housing expenses compared to the general population, but healthcare costs might become a more substantial portion of their budget. By comparing personal spending in major categories with the current inflation rates, retirees can calculate a more accurate personal inflation rate.
Secondly, retirees should assess how much of their income is adjusted for inflation. Social Security benefits are directly linked to CPI, providing a reliable inflation adjustment. Similarly, some public-sector pensions and fixed annuities with inflation riders offer similar protections. For portfolio income, Treasury Inflation-Protected Securities (TIPS) are the only investments explicitly designed to guard against inflation.
Constructing a ladder of TIPS, with one maturing each year during retirement, can help ensure consistent inflation-adjusted income.
Lastly, retirees should consider their stage in retirement. High inflation during the beginning of retirement can exacerbate the situation, as rising costs will persist throughout one's lifetime. This scenario is akin to sequence risk, where poor performance at the start has long-lasting effects. Historically, periods of high inflation have coincided with strong market returns, which can offset the erosion caused by higher prices.
Nonetheless, retirees should be cautious about spending too much during times of high inflation, as it could deplete their portfolio faster than anticipated.
Written by urgent.news from Fast Company's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
