Retirees and near-retirees have seen their fair share of market corrections and crashes, and know that the stock market can quickly lose value under specific circumstances. But zooming out shows a long-term upwards trend.
While many retirees are understandably worried about the stock market producing a bad year right when they walk away from their careers, that may not be the biggest hurdle their portfolio will face. While the stock market can have dramatic price swings, the quiet destruction of purchasing power via inflation is a threat that shouldn’t be ignored.
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The real threat: inflation over time
Inflation can deplete retirement savings accounts without you knowing it. The typical inflation rate of 2% to 3% may not sound like it can do major damage, but it can eat away at your savings significantly over time.
Healthcare inflation tends to be even higher. And health care spending can significantly increase as you get older.
Why the stock market isn’t the biggest problem
Although the stock market is subject to periods of high volatility, it tends to go up over time. Companies recover, consumers spend their money more confidently and asset prices climb.
Meanwhile, bonds don’t always keep up with inflation and cash is guaranteed to lose purchasing power in the long run. Retirees who flee to the “safety” of cash end up enduring decades of purchasing power erosion and miss out on the growth potential of stocks.
The stock market, of course, comes with risks. You shouldn’t go all-in on a single stock, and there are ways to diversify beyond an S&P 500 index fund. However, an all-cash approach can guarantee you’ll lose purchasing power over a long period of time.
What inflation-resistant portfolios look like
An inflation-resistant portfolio has multiple asset classes. It doesn’t focus exclusively on high-growth sectors like tech, and it offers several options to minimize the impact of high inflation.
Treasury Inflation-Protected Securities (TIPS), I-bonds, dividend growth stocks, real estate, gold and commodities are some of the investments you can find in a well-balanced, diversified portfolio. Gold in particular can be a valuable inflation hedge with a long history. It has been a means of exchange for millennia, and more recently, it has a history of outperforming the stock market during times of high inflation and geopolitical uncertainty. Many experts recommend allocating 5% to 10% of your overall portfolio to gold.
The limits of Social Security COLA
Your Social Security benefits are designed to offer some inflation protection, but they’re not an ironclad solution. The cost-of-living adjustment (COLA) calculation is based on the consumer price index, which measures inflation and may not account for inflation for retirees who spend more money on healthcare and housing. Prices for some categories rise at faster rates than others, and that can make COLA gains feel insufficient.
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