Will inflation impact our retirement plan? In all likelihood the answer is yes. But how, is less clear.
Inflation impacts us in ways we may not realize. It works its negative effect on the price of our goods although when it comes to indexing the number, some of the more volatile components are not included. (Food and fuel are not included in the index because they tend to fluctuate in price more frequently the overall consumer goods and because of these price moves and because the index is tied to payments that adjust for the cost of living such as Social Security.) It als o works its way into our retirement investments as well. worming its way into our plans and essentially hurting plans made without it in mind.
Inflation is expected to increase in the coming years and possibly begin a steady increase over the coming decades. Experts agree that the current debt many countries are providing the economy (in the form of stimulus) will eventually catch-up. Inflation is how this occurs. In order to recoup the cost of all of this stimulus, something has to give. prices will need to go up and when that happens, any number of things can begin to add to the problem.
This flood of money into the system will eventually force interest rates up even as the currencies around the world weaken. Rather than focus on the currency markets, the more understandable interest rate increase will put pressure on people trying to save, folks trying to protect current savings with bonds and on those trying to borrow money.
In a recent report by Mohamed El-Erian, Pimco’s co-chief investment officer concerning the markets, he wrote that “the impact of increasing monetization of debt, gradually rising inflation rates and a worsening of inflationary expectations” do not bode well for the future of inflation. Although it has been somewhat benign, it can not be expected to remain so for much longer.
There are a couple of things you can do. If you are prepaying your mortgage, perhaps adding a thirteenth or fourteenth month payment, you can stop doing that and redirect that money elsewhere. There is an upside effect of a long-term mortgage in an inflationary period: your payments remain the same as the money you pay for the debt is worth less.
Treasury Inflation Protected Securities or TIPS are also a good hedge against inflation pressures in part because the payment your receive is adjusted as inflation increases. It is less volatile than gold, for instance, but the risk is essentially removed. So it is a good place to protect your capital in an inflation upswing.
Gold has also been consider a good protection against inflation and it will be this time around as well. the price of this commodity, as with almost all commodities will increase as inflation rises.
My long-term issue with target date funds will come to fruition in a inflation rampant environment. Because these types of funds (target date funds allow you to pick a retirement year and readjust the underlying holdings in the fund as you age from aggressive to conservative, from stocks to bonds) will be making adjustments for investors closing in on retirement at or about the same time inflation begins to effect the bond market, the strategy will fall short of where it needs to be. Bonds will become more expensive as a surge of investors head for safer ground, creating what could be a bond bubble.
In the short-term, we don’t have too much to worry about when it comes to inflation. But in the long-term, we will. If you haven’t diversified your retirement portfolio, now is the time to make some of those adjustments. Focused on equities across a wide variety of investment styles (including some exposure to commodities) will be the best hedge against an inflation heavy market.
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