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:
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.”
This content is provided for informational purposes only and is not intended to serve as the basis for financial decisions. Strickler Financial Group is an independent financial services firm that utilizes a variety of investment and insurance products.
Investing involves risk, including the potential loss of principal. Any references to [protection benefits, safety, security, lifetime income, etc.] generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
Securities offered only by duly registered individuals through AE Financial Services, LLC (AEFS), member FINRA/SIPC. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Insurance offered through Strickler Financial Group. Strickler Financial Group is not an affiliated company with AEFS or AEWM. 1976560- 1/22.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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.
This Week in Cannabis Investing: Safe Banking Act in Focus During Lame-Duck Session
Marijuana advocates are hoping the outgoing Congress will take action on the Safe Banking Act, legislation that will improve cannabis companies' access to finance.
By Morgan Paxhia • Published
Kiplinger's Weekly Earnings Calendar
stocks Check out our earnings calendar for the upcoming week.
By Karee Venema • Published
Can You Build a Retirement Income Plan With Both Risk and Reliability?
Two strategies for making retirement savings last — probability-based income planning and guaranteed income planning — can help ensure you have what you need in your golden years, but which is right for you?
By Scott M. Dougan, RFC, Investment Adviser • Published
5 Financial Wellness Tips to Help Weather the Winter
You can regain some control over today’s money pressures by exploring your employer's financial support options and benefits, making plans to save and taking other simple actions.
By Aaron Harding, CFP® • Published
10 Common Investing Mistakes That Can Easily Be Avoided
Some of these missteps might be a given when you’re starting out. A financial adviser offers tips on how to stay on track for years to come.
By Vincent Birardi, CFP®, AIF®, MBA • Published
I'm a New Widow. Who Are the Experts I Should Consult?
A support network of experts who can help a new widow can be just as important as your personal support network at such a difficult time.
By Stacy Francis, CFP®, CDFA®, CES™ • Published
Is Your Money Really Working for You? A Math Lesson in Rates of Return
Getting a high average rate of return does not necessarily equate to actual money in our pocket. A personal finance expert explains why math doesn’t equal money.
By Kyle Winkfield • Published
What’s Standing in the Way of Your Successful ‘Money Mindset’?
Many of us have common biases that keep us from making the best financial, and other, decisions. Knowing what they are and addressing them can help us set a new path forward.
By Ali Swart, CFP®, MBA • Published
Getting Ready for Retirement? We Explain Key Elements and Options
Retirement savings are just one component of your financial profile once you hit your golden years.
By Cory Chapman, Investment Adviser Representative • Published
3 Deadly Sins of Delaware Statutory Trusts
DSTs can be highly attractive to real estate investors, but it’s imperative to temper expectations and consider the big picture before diving in.
By Daniel Goodwin • Published