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How to beat inflation for retirement

What is Inflation? Inflation is simply when the monetary unit of a country buys fewer goods and services over a prolonged period of time. So, to buy one gallon of milk might have taken you two minutes of work to pay for that milk a year ago, but today you need to work five minutes to pay for the same gallon of milk. When applied to everything you need, that translates into much more time spent to pay for necessities. The United States has seen a continual degradation of the dollar due to inflation, but it is possible for countries to see an increase in the value of their money as their economies and governments become stable or make room for innovation. Inflation is most commonly calculated by the consumer price index (CPI), but there are three other common measurements, producer price indices, core price indices, and GDP deflator.

Does it really affect me?

High inflation in the short term affects your ability to save money and pay off debt if your salary doesn’t increase along with inflation. It will be especially rough for you if your industry experiences a downturn while inflation rates are on the rise. Inflation most negatively affects household with an income under $20,000 who cannot easily adjust non-discretionary spending habits.

Inflation negatively affects retirement efforts over the long term, especially if those efforts are modest. Elderly retirees who depended solely upon company retirement packages are now facing borderline poverty. The biggest flaw to these retirement packages is that they didn’t plan for an economy with a significant increase in inflation over a relatively short period of thirty years. Pensioners who retired in the 80’s with a comfortable monthly check are now surprised to find they can’t live off that same monthly check even if their lifestyles have become more simple.

This clearly necessitates that you plan your retirement to expect a high rate of inflation for the end of your retirement years. Highballing how much you might need at the end of your life will be a better bet than making a low estimate of how much you’ll need when you first start your retirement years. You also need to take into account that inflation will affect the cost of healthcare; you most likely will need more care as you age. Retirees also tend to spend more money during their free retirement years than during the years when they were working. So your current standard of living may not actually be enough to cover your spending habits during all your free time years as you travel, shop, eat out and visit relatives.

The demise of pensions as a retirement option has at least taught current financial planners to abandon the traditional plan of investing more money into bonds as a tried and true way to plan for retirement of investing 80% of retirement money into bonds once the saver enters into retiree years. Although bonds are protected against inflation, they do not fare well in the long run as an investment option. It’s true that the stock market is riskier from day to day, but it has a proven track record of producing the highest return on investment in the long run when compared to bonds and other investments protected from inflation. The best plan for retirement that protects against inflation utilizes savings, thriftiness, and investments diversified across safe and risky options.


When High Inflation Is Your Friend

Mark Twain said, “Buy land, they’re not making it anymore.” Although technically this isn’t true anymore considering man made coasts and islands, Twain is right that real estate is a good investment, especially to guard against times of high inflation. Retirees should be strategic in where they buy land, near communities that will need your land to continue to grow or in an area that will have little options for rent, but high demand. Real estate prices rise during times of inflation, and so do rent prices. So if you invested in pieces of real estate, whether they’re just plots of land or actual homes, these properties can provide you with steady income, especially if the property is mortgage free. Unlike bonds, the economic power of the money you earn from the real estate will match the value of the dollar during the year the real estate is making you money. Buy real estate, even if you have to take out a bit of loans at a fixed rate, during times of low inflation. Do not get a mortgage that has a variable rate; during times of high inflation, your loan rate will go up. Then, the money you could have made from your investment will be eaten up by the variable rate increase on your loan. It should go without saying, but avoid buying real estate during times of high inflation.

Commodities are other investment options for buying during times of low inflation to protect against times of high inflation. There is considerable risk in buying a commodity, so choose well and consult a financial planner. Oil has long been touted as a great option for a commodity investment to protect against high inflation, but that’s not going to remain the case for forty more years as inventors seek to lead the globe away from oil obsession. Food, especially sugar, copper, uranium, silver, gold, zinc and other precious metals are great options for commodity investment. Energy commodities other than oil are still good commodity investments. All of these commodities do better than other investments during times of high inflation because they are traded globally and depend on more than one country’s GDP growth. It’s highly unlikely that the world will stop wanting any of those commodities any time soon, and so during times of high inflation, your commodity shares won’t tank like other stocks related to fields that experience shocks during times of high inflation.

Now that you know all of this, are you contemplating any changes to your retirement strategies?


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