Should You Be Protecting Your Investments against Inflation?
By: Barry E. Haimo, Esq.
November 5, 2020
The COVID-19 pandemic has changed the world and markets right along with it. This has a lot of people with money invested worrying about inflation — and for good reason. Inflation can eat away at your savings and investments.
When the markets become volatile or look to be heading in that direction, it’s a good idea to think about how you can best protect your investments against inflation. Here’s what you need to know about inflation as it relates to your investments and a few strategies you can use to help.
Why Protect Your Investments against Inflation?
If you stop to think about it, the cost of living over the course of your life has likely increased substantially. There are many ways these changes are tracked by the government, one of which is the Consumer Price Index.
Essentially, Consumer Price Index levels show in the long run how much the cost of living increases. Currently, the increase is about 3.5 percent per year. While that may not sound significant, over the course of a retirement lasting 30 years or so, your cost of living can more than double.
In other words, when you retire your cost of living could be $100,000. But in a couple of decades, it could cost you $200,000 to enjoy the same standard of living. This is why it’s imperative to protect yourself and your investments — especially throughout your retirement — so that you can live the way you want when you’re no longer working.
Strategies to Protect Your Investments
There are several effective strategies you can start using today that can help to protect your investments from a volatile market and an increased cost of living. These include:
Increasing Annual Contributions to Savings
It’s a great strategy to set up automatic transfers from your main checking account or paycheck into a savings account and investments, but don’t forget to adjust those contributions for inflation.
It’s a good rule of thumb to adjust your contributions at least once per year. Some financial institutions offer automatic adjustments to your contributions, so it’s a good idea to look into that.
Investing in Real Estate
Real estate income is more valuable than gold when used as an investment hedge against inflation. This type of investment has been found to beat inflation on an annual basis.
If you’re worried that you simply don’t have the resources to invest in real estate, then you can gain exposure to this type of income through real estate investor trusts. This type of investment maintains a high dividend payout ratio (about 90 percent), and because they trade on major stock exchanges, they maintain their liquidity too.
Investing in Treasury Inflation Protected Securities
Treasury Inflation Protected Securities are a great addition to a bond portfolio. They are government-backed bonds that offer an inflation protection component and they’re some of the safest securities to invest in because they’re backed by the federal government.
Inflation may not be avoidable, but you can avoid letting it have a big impact on your investments. If you want to discuss more ways to protect your investments, contact Haimo Law today.
Barry E. Haimo, Esq.
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