While saving for retirement, people often forget that the goods that they will purchase years from now will not cost the same as it is now. Because of inflation and other supply and demand shifts, it is most likely to cost anyone more to buy the same products. So it’s important to consider the effects of inflation while planning the amount of money we will need after our retirement.
Here are five ways to make retirement savings inflation-proof:
Don't be too conservative
As the retirement date draws nearer, people often plan on investing in low-risk bonds in the hopes of a higher percentage return. But usually, they ignore the real return on these investments after considering the effects of inflation.
Suppose a bond has a rate of return of 5.0 per cent. After considering inflation of 3.0 per cent, the actual payoff will be lower as the real rate of return will be only 2.0 per cent. So, we should consider other options and include riskier investments, such as stocks, in our retirement savings plan. Although risky stocks may lose value, they have the potential of proving a higher return.
Do your research before investing in stocks
Before investing in stocks, one must do our research as certain companies and financial sectors thrive when inflation rises, while others struggle. For instance, one may lose out by investing in retail stocks as retailers tend to struggle when high inflation raises the prices of products they are selling making them unattractive to consumers. Investors need to search for sectors that tend to do better with higher inflation.
Invest in commercial real estate
The value of the commercial real estate can continue to rise at times even when the financial market is struggling.
Thus, with a combination of investments in commercial real estate along with stocks, one can have diverse retirement savings portfolio which can be used as a hedge against inflation and future uncertainty.