Here are six strategies to help protect your retirement income plan and win the battle against inflation:
Over the course of your working and retired lives, inflation will continue to erode the purchasing power of your retirement savings. As you save, remember that food, transportation and healthcare are also likely to cost significantly more than they do today.
How can I get more inflation-proof income? You can turn pension savings into a guaranteed income which also increases each year in line with inflation, for life. In exchange for your pension pot, an insurance company will increase the annuity income they pay as inflation changes each year.
Deflation hedges include investment-grade bonds, defensive stocks (those of consumer goods companies), dividend-paying stocks, and cash. A diversified portfolio that includes both types of investments can provide a measure of protection, regardless of what happens in the economy.
No investment is completely safe, but there are five (bank savings accounts, CDs, Treasury securities, money market accounts, and fixed annuities) that are considered to be among the safest investments you can own. Bank savings accounts and CDs are typically FDIC insured.
Best Ways to Invest Your Retirement Savings
CSRS retirees are guaranteed full inflation catchups each January via a cost-of-living adjustment pegged to the Consumer Price Index-W. FERS retirees get COLAs once they reach age 62, but they are reduced if the inflation-adjustment exceeds 2 percent.
The calculations are dependent on pure assumptions. Who knows how long you'll live, or how much you'll spend in retirement each year? The calculator estimates the inflation and returns, but it's just that: an estimate.
Typically, I like to use a 2% inflation figure for retirement plans. You can start with this benchmark and then adjust for your personal beliefs. For those people that think inflation is a real fear in the future, then increase that to 3%.
As you can see, inflation-adjusted average returns for the S&P 500 have been between 5% and 8% over a few selected 30-year periods. The bottom line is that using a rate of return of 6% or 7% is a good bet for your retirement planning.
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