5 Ways To Hedge Your Retirement Income Against Inflation, #88
Has inflation gotten you down? Are you worried about rising prices and how to combat them in retirement? This episode is for you! Let me show you five ways to hedge your retirement income against inflation and why these methods are effective.
You will want to hear this episode if you are interested in...
Delay collecting Social Security benefits [1:56] Waiting till full retirement age. You can
Does your pension have a cost of living adjustment? [6:07]
Invest in stocks and real estate [7:21]
Why you need I-Bonds in your retirement portfolio [10:38]
Is your portfolio worth its weight in gold? [13:16]
An essential retirement planning strategy
Any regular listener of the podcast has heard me talk about delaying the collection of Social Security benefits until their full retirement age. The longer you wait until age 70, the more your monthly benefit will be. If you can wait, do it! However, with the current rise in inflation, waiting to receive your maximum benefit is quickly becoming an essential strategy for retirement planning. Not only will your monthly benefit be larger, but the cost of living increases to that benefit will be as well. A 5% increase on $2,000 is obviously more than the same increase on $1,000. That extra money in your pocket will help you keep pace with inflation.
So what does a cost of living increase for Social Security benefits look like? The percentage is determined by the Consumer Price Index. Over the last decade, we haven’t seen much of an adjustment. However, last year saw a large 5.9% cost of living increase. The downside to this strategy is that you have to live long enough to make back what you’re giving up by deferring your Social Security benefits. Give this episode a listen to learn how to figure out YOUR specific “break-even point”.
Weigh your options and do what makes sense
Another great way to use retirement income to shield yourself from inflation is through your pension. If it allows for a cost of living adjustment, it would be in your best interest to know exactly how it works. You need to know how that cost of living adjustment is determined. Any pension that offers you a cost of living increase will clearly communicate what they tie that number to. Similar to delaying Social Security benefits until your full retirement age or age 70, there is a “break-even point” to consider because a pension with a cost of living adjustment always pays out less initially than one without. Weigh your options and do what makes sense!
Investing in stocks and real estate is another way to fight inflation with your retirement portfolio. Since 1957, the S&P 500 has reported an average annualized return of 10.5% through 2021. When you have a significant allocation of your retirement investments in stocks and stock funds, you’re trusting in the time-tested reliability of the market to eventually adjust for inflation. However, volatility can be an issue. Over the last 30 years, the S&P 500 has seen an average intra-year decline of 15.7% and it’s declined over 30% a total of six times. Including when the pandemic hit in March of 2020. Obviously, we can’t take the good without the bad, but stocks have proven to be a useful hedge against inflation. For more information, listen to this episode!