retirement

How to protect against inflation

My retirement case is too difficult to ask a personal question. But I have a general question that I have thought about and have been asked: How do I assess and plan for inflation over the course of my retirement?

Please provide a step-by-step answer for living to be 100 years old.

Thanks a million for considering this question and helping many readers.
Candice Collins
Berkley, Calif.

Candice,
 This is a great question. We're living longer, and for many of us, retiring at age 65 means we still have a good 30 years ahead of us. That's a big chunk of time, which is why you have to generate returns on your investments that will beat inflation. A plain vanilla savings account or even a CD just isn't going to cut it. These accounts may help you sleep at night now, but they'll only have you worrying later.

There are a couple of ways to protect against inflation. One that gets mentioned a lot is Treasury inflation-protected securities, or TIPS. These are guaranteed to keep up with inflation because your principal is adjusted to reflect it, but the return on your investment isn't that great. Still, if you're relatively close to retirement age, or you're already there, devoting a small portion of your portfolio to these is a good idea.

Another investment that typically beats inflation is commodities. They go up in price with inflation, so you may want to devote another small chunk of your portfolio in that direction. But note that commodities have had quite a run recently.

Bottom line: Diversification in your portfolio is key. You never want to have too much of your money in a single area. And you need to maintain some exposure to stocks and bonds until you're quite close to your 100th birthday.

A few other thoughts: Make sure your longevity plan takes into account where you're going to live -- perhaps you have too many stairs in your current house. You also want to think about how you're going to pay for health care, or at least the gap between Medicare and the care you want.

And if you have a long-term-care insurance policy -- and you should if your investable assets are more than about $300,000 and less than $1.5 million -- be sure to purchase an inflation rider to go with it.

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