Here’s What You Can Do to Counter the 3 I’s Affecting Retirement Plans

Inflation, infrastructure, interest rates: Understanding which variables you control and crafting a plan of action can help you gain confidence in your financial future.

A hand holds up a magnet in the shape of a capital "I."
(Image credit: Getty Images)

Inflation rose like a rocket in 2021. Some think the new infrastructure legislation will add to inflation, and interest rates are likely going up in 2022.

These are the three I’s causing particular concern among retirees and those who are nearing retirement. What kind of impact could inflation, infrastructure and interest rates have on their retirement plans?

Mitigating the impact of the three I’s — or finding ways to still come out ahead — could come down to making adjustments to your plan. Here are some options to consider:

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Ways to Blunt Inflation’s Impact on Your Retirement

The past decade of low inflation made it easy for many to forget the impact rapidly rising prices can have on everyday life. Most people nearing or in retirement might remember the high inflationary days of the 1970s and early 1980s. Today, we are reminded daily about inflation when we visit the grocery store or park at the gas pump. All these increased costs can put a strain on retirement, especially when you have to draw down on your assets sooner than anticipated.

Historically speaking, hard assets like real estate, commodities and stocks tend to appreciate during times of inflation, which could potentially help those investors offset the rising costs of goods and services.

For those who are concerned about the risks that these types of investments pose, you may want to consider using a bucketing approach that divides your money into short-term, mid-term and long-term segments.

  • The short-term money (assets needed for everyday expenses and for the next two to three years) should be invested more conservatively in such things as bank accounts, CDs and short-term bonds.
  • Mid-term buckets include assets not needed for five to 10 years, such as longer-term bonds, dividend investments, real estate investment trusts (REITs) and fixed annuities.
  • Inflation-hedging assets (consisting of stocks, primarily) are held in the longer-term buckets.

Infrastructure: Look for Investment Opportunities

Adding to the inflationary pressures are the effects of the government spending on infrastructure. The Infrastructure Investment and Jobs Act (opens in new tab) was signed into law by President Biden on Nov. 15, 2021. It consists of $1.2 trillion in spending, which is expected to add to the inflationary pressures as those dollars make their way through the economy. However, when there is a change, it also can create new opportunities that didn’t exist previously. There will likely be industries and specific companies that will benefit from the spending, and it would be wise to think about who those benefactors may be when evaluating your investment portfolio.

With Higher Interest Rates, Consider Bond Alternatives

The Federal Reserve lowered the federal funds rate in December 2008 to between 0% and 0.25% (opens in new tab) in an effort to stimulate the economy during the Great Recession. Today we have historically low interest rates, although the Fed has indicated it will raise rates in 2022 to combat high inflation. If you have a mortgage going into retirement, you may want to see if it makes sense to refinance before rates go up. The downward trend on rates in recent years helped raise the value of bonds, and many retirees use bond funds as a less volatile holding in their retirement accounts. On the flip side, if rates rise to help calm the inflationary pressures, it will likely have a negative side effect on bond fund values.

One thing to consider here would be some alternatives that aren’t as sensitive to rising interest rates, such as short-terms bonds, Treasury Inflation-Protected Securities (TIPS), floating rate loans and fixed annuities. Niche alternatives include life settlements, music royalties and litigation finance, to name a few. It’s important to understand the various risks these alternatives may present, so consider discussing them with your financial planner.

Inflation, government spending on infrastructure and interest rates are things you can’t control. But with good planning based on learning your options, you can make the adjustments necessary and possibly prevent these three I’s from becoming major bumps in your retirement road.

Dan Dunkin contributed to this article.

CFP Board owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S.”

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Russell Strickler, CFP®, AIF
Founder, Strickler Financial Group

Russell Strickler is a CERTIFIED FINANCIAL PLANNER™ professional and Accredited Investment Fiduciary® at Strickler Financial Group (opens in new tab) who has worked in the financial services industry since 2005. He earned his bachelor’s degree in business administration and his CFP® certification at Oakland University.