Inflation-Fighting Chance of the Retirement Investor The smartest investor


When the Labor Department announced that the consumer price index hit 5% in May, it signaled that inflation could become an impending challenge for investors. This increase, the largest 12-month increase in nearly 13 years, is a particularly alarming development for current and near-retirees who need their income and investments to beat inflation.

For most of their careers, many baby boomers have experienced fairly modest periods of inflation. Over the past 40 years, from 1980 to 2019, inflation averaged a modest 2.95%. Is this current year-over-year rise in inflation a sign of a changing tide? Or should investors expect the threat of prolonged inflation to be felt soon?

The current state of inflation

There is no shortage of opinions on this hot topic these days – any research online will yield countless results on inflation and related investment considerations. While some reports are useful, others are clearly intended to promote investment products or to sensationalize the data.

For current retirees and near retirees who must fight against their desire to fight inflation, certain lucid prospects are justified. Here are three facts about inflation to understand:

  • The Federal Reserve’s policy-making group – the Federal Open Market Committee – predicts that core inflation will stabilize at 2.1% by early 2022.

  • The profitability spread between the 10-year Treasury yield and the yield on 10-year inflation-protected Treasury securities, called TIPS, generally reflects the outlook for market inflation. Currently, the market’s inflation forecast is below 2.5%.

  • The economy is still woefully short of the Federal Reserve’s second term: maximum sustainable employment, which can also impact inflation over time. The National Federation of Independent Businesses reported in May that nearly half of small businesses are unable to fill their vacancies. As the slowdown in unemployment eases over the next few months, this will likely reveal more of what the transition will mean for inflation expectations and long-term structural aspects of the economy.

What about investments?

Increases in expenses of daily living can strain a retirement portfolio, especially if inflation gains a little more strength in the second half of the year. That said, here are some constructive ways to prepare your portfolio for a time of higher inflation:

Look at the “Popeyes” in your wallet. Much like the fictional character who is a powerful ally to his friends, stocks have a long history of consistently helping retired investors. Innovation is the spinach that provides the necessary punching power that retirement investors need over time. According to new research from Hartford Funds, from March 1973 to December 2020, US stocks exceeded inflation rates 90% of the time when inflation was 3% or less, and 76% of the time when inflation was. greater than 3%. and on a downward trend.

Put some money to work. There is currently a large amount of money in savings in savings accounts. Annual returns on bank savings are currently well below the current level of inflation. For everyday expenses beyond the next 12-24 months or large expenses (like a down payment on a house) over the next five years, maybe now is the time to consider how excess cash reserves can work. stronger in your wallet.

Expand the boundaries of your sources of income. Traditional sources of income, such as high-quality corporate bonds, municipal bonds, and treasury bills, can serve as excellent ballasts in a retirement portfolio. The S&P US Aggregate Bond Index tracks these sources of investment and currently reflects an annual yield to maturity of around 1.36% in June 2021. This is currently better than a bank savings yield. But to maintain a competitive advantage in your source of income, consider adding other alternative sources.

Real estate investment trusts, or REITS, for example, are currently earning around 3%. TIPS adjust for inflation and can offer investors some protection when inflation is rampant as well. But tips are not the best source of income when inflation is moderate or low. High dividend emerging market equity companies are currently earning over 4%, and emerging market bonds are yielding just under 4%. Since REITs and emerging markets can be quite volatile, some investors might turn to multi-asset income investments to access these asset classes while mitigating some of the risk.


Investors’ thirst for performance has been a recurring theme since the 2008-2009 financial crisis. The potential for higher inflation – albeit temporary – only complicates matters for retired investors. What has not changed, however, is the undoubted advantage of a portfolio diversified across a variety of asset classes. Diversification offers retirement investors multiple opportunities for success, often with lower levels of risk and the better chance to fight inflation.

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