What experts say what to do when inflation has you worried about your retirement

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Inflation may be worrying you about your retirement.

Prices have gone up for everything from food to housing. In April, the consumer price index, which measures the prices of goods and services, rose 8.3% from the same period last year.

According to a Pew Research poll, 70% of Americans say inflation is “a very big problem” for the country.

Meanwhile, some older adults are choosing to delay retirement: Thirteen percent of Generation Xers and Baby Boomers said they have postponed or postponed plans to retire because of rising costs, a survey by the Nationwide Retirement Institute found.

Add a volatile stock market to the mix, and those saving for retirement can start rethinking their investment plans.

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Still, investing in stocks is the best hedge against inflation, said Tom Henske, a New York-based certified financial planner.

“One of the main reasons you invest is to protect your purchasing power,” he explained.

The value of cash decreases with inflation. Your investments may also be affected, but in general, stocks have held up well against inflation over the past three decades, according to a 2020 analysis by US Bank Asset Management Group.

With inflation still high and stock market volatility continuing, here are some steps you can take to protect your retirement portfolio.

Keep contributing

If you don’t experience a drop in income, continue to contribute to your retirement plan, said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

“With your employer-sponsored plan, you use the dollar cost average,” she said.

This means that you invest your money equally at regular intervals, no matter how the market develops. Essentially, it reduces risk but may not generate as high a return as an equity investment.

If you are over 50 and eligible for a Roth 401(k), Roth 403(b), or Roth TSP (savings plan), you should consider posting catch-up contributions to the account. For 2022, that’s a maximum of $6,500. You pay taxes on contributions, so you don’t have to pay when you withdraw the money.

“Tax diversification is important,” said Cheng, a member of the CNBC Financial Advisor Council. “Building a bucket of tax-free income in retirement is definitely something to consider.”

Have some cash ready

It is important to have cash reserves in case of emergencies. By keeping a savings account separate from your investments, you don’t have to tap into stocks or other assets when you need money.

Check your emotions

Immersing yourself in the drama of a volatile market is easy and could lead to emotional decisions that could potentially impact your retirement savings. It’s best to check those emotions at the door.

If you’re concerned about your ability to keep your feelings out of the equation, consider asset allocation funds or target date funds, Cheng said.

Target date funds essentially put your savings on autopilot, which adjusts based on your target retirement date. An asset allocation fund has a diversified portfolio across different asset classes.

Be varied

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Your portfolio should be a mix of different assets like stocks and bonds, and the allocation should be driven by your risk tolerance, time horizon, cash flow needs and taxes, Cheng said.

Bonds pay a yield if they are held to maturity. When it comes to bonds, be diversified in terms of credit quality, quality and maturity, she said.

A portion of your fixed income securities may be invested in Treasury inflation-linked securities. Like traditional government bonds, TIPS are issued and supported by the US government. However, TIPS offer protection against inflation, since the main proportion, as measured by the consumer price index, changes with inflation.

Your portfolio should also include both growth and value stocks and mutual funds or exchange-traded funds, Cheng said. Additionally, you should consider companies that regularly pay dividends, which can help weather volatility, she said.

“Large companies that have a long history of paying consistent dividends every year have an advantage in an inflationary environment: they can survive — and even benefit from — higher prices,” Cheng said.

Then there are assets traditionally considered inflation hedges, such as gold and other commodities, and real estate mutual funds. The decision to add them to your portfolio, and how much, again depends on your time horizon, Henske said.

“The further you are from needing the money, the more equity exposure you have in your portfolio,” he said.

As you get closer to retirement, you might build up some of your hedges, like TIPS, gold and commodities, Henske added. “You want to do everything in moderation because you don’t have a crystal ball,” he said. “We don’t know what’s going to happen.”

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https://www.cnbc.com/2022/05/17/what-experts-say-to-do-with-your-retirement-savings-amid-inflation.html What experts say what to do when inflation has you worried about your retirement

Gary B. Graves

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