Tips on How to Protect Your Nest Egg From Inflation

By Bridgelight Financial Advisors

For the past decade inflation has averaged under 2 percent a year for the typical American (1). According to a statement released by the Labor Department earlier this month, prices have risen 5% between May 2020 and May 2021. This spike in inflation is directly related to the United States lock down due to the spread of COVID-19 throughout the country last year. With the rollout of vaccines and parts of the economy (such as travel) reopening we’re seeing an increase in the price of goods all across the United States. If you’re not paying close attention to this spike in inflation, it could very well eat away at your hard-earned retirement savings.

Understanding Inflation

Inflation has a significant impact on every single one of our financial lives. Understanding how this works will give you a much better chance at protecting your nest egg down the line. In simple terms, the services you use and the products you buy increase in price with inflation. This results in minimizing the purchasing power of your dollar, meaning you can buy fewer items for the same amount of money. As the price of good and services go up, the power of your dollar goes down. The relationship goes hand in hand. So, what does this mean for your retirement savings? The worth of your retirement dollars goes down, meaning inflation will start eating away at the nest egg you’ve worked so hard to protect. When inflation isn’t expected and wages do not keep up with the rise of the costs of goods and services, inflation can erode your savings. Unfortunately, you’ll need more money to maintain your standard of living.

Ways To Combat Inflation

I know what you’re thinking, how do we go about avoiding this leading up to our retirement years? Figuring out the best ways to fight inflation on your own is a gamble. Consulting with your financial advisor when the economy changes as it has in the last year is a smart way to protect your retirement savings and plan for rough roads ahead.

1. Continue Working – If inflation in suspected, growing economies typically have inflation rates that allow for wages to keep up. If you continue working through your retirement years, you’ll be able to collect a salary and benefits that will rise along with inflation (2). Delaying your retirement past age 62 and up until your full retirement age is a good idea in general if you want to be earning more with your social security benefits. When it comes to combating inflation, this can protect you and your family later in your retirement years because your income (as well as future benefits) will be based on a higher overall salary due to your extra years of work. When you work during your retirement years you’re allowing your money to continue to grow – this way you have more money to live on.
2. Invest in Inflation Stocks – It’s important to note how interest rates impact the price of bonds during periods of high inflation rates. When rates rise, bond prices fall. That being said, don’t let this steer you away from keeping your investments in stocks. Investing in stocks are typically a great source of income for retirees and remaining in these stocks during retirement can help your savings keep up with inflation. We all know making money off of stocks is not guaranteed, but “blue chip” stocks have proven to be consistent over long periods of time (3). Blue chip stocks pay dividends, meaning they pay a sum of money from their profits regularly to their shareholders. More shares equal more dividends. This allows for a great stream of income that goes directly into your accounts during inflation.
3. Buy Real Estate – This is a tactic that’s recommended if you’ve already paid your own house off. Buying more real estate is a great source of income earned from renting out that new property, and it actually works great with inflation! This is due to the fact that when inflation rises, property values rise too allowing you to charge more for renting that space out. This results in you earning a higher rental income over time keeping pace with inflation rates (4). Although you will be paying a good amount of money upfront when purchasing the property as well as needing to maintain the property down the line, this is a great investment that is sure to put money in your wallet as inflation may continue to rise. Income is the number one combat for inflation and the more sources of income you have, the better.
4. Be Mindful of Your Spending – This may seem obvious but it’s something that needs to be addressed. Overspending directly impacts inflation translating into excessive aggregate demand. When the consumers demand outweighs the goods and services provided, businesses have the higher ground. This enables them to raise their prices. So, while in inflation, make sure to only spend your dollars on what you really need. It may be hard to adjust the life you’re comfortable living but just remember that it’ll benefit you in the long run. While you’re not touching your retirement savings, you’re allowing your money to grow! Being mindful of what you’re spending not only protects your money, it grants your money the power to mature.

This just a handful of actions you can take to protect your retirement savings as inflation rates rise, but there’s a whole lot more where that comes from. If you’re worried about the rise of inflation and how that will affect you and your family during your retirement years, our team at Bridgelight Financial Advisors would love to help you experience confidence in every aspect of your financial plan. Call (203) 795-7080, email Advice@BridgelightAdvisors.com, or schedule an appointment online to meet and get started.

About Bill

Bill Leavitt is the president of Bridgelight Financial Advisors, an independent, privately owned fiduciary financial advisory and financial planning firm. He specializes in working with pre-retirees, retirees, professionals, and women investors, helping them navigate a complicated and ever-changing investment landscape. With over 25 years of experience, Bill serves his clients using his own unique financial planning model, The Wealth Focus™ Process, where he helps clients develop their customized long-term wealth strategy in four comprehensive steps. A Connecticut native, Bill resides in southern Connecticut with his wife, Laura, and their three daughters. To learn more about Bill, connect with him on LinkedIn.

(1) https://www.washingtonpost.com/business/2021/06/10/inflation-what-to-know/

(2) https://www.investopedia.com/ask/answers/081715/are-social-security-benefits-adjusted-inflation.asp

(3) https://wealthfit.com/articles/blue-chip-stocks-most-consistent-stocks/?itm_source_h=protect-retirement-from-inflation&itm_medium_h=article-referral&itm_content_h=text-snippet&itm_campaign_h=engagement-visitor

(4) https://homeguides.sfgate.com/effect-inflation-housing-prices-2161.html