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4 weapons for fighting inflation

By Jennie L. Phipps ·
Wednesday, October 24, 2012
Posted: 2 pm ET

If you think you are going to live on less in retirement, think again. Even if you tighten your belt, inflation will drive your spending up and do a number on your retirement planning.

A survey of spending trends and inflation factors for J.P. Morgan Asset Management shows that not only do people 65 and older spend almost the same amount on practically everything as those of ages 25 to 34, but also they are harder hit by the extraordinary inflation affecting the costs of health care. And that is unlikely to change with Medicare clearly a spending target, no matter which candidate is elected in November.

"Older people are buying a basket of goods that is inflating more quickly because 15 percent of their wallet is spent on medical care and that is inflating faster than anything else," says Certified Financial Planner professional Katherine Roy, an executive director at J.P. Morgan Asset Management.

Roy also points out there's a 50-50 shot that if you're healthy at age 65, you or your spouse will live to be 90. That's 25 years of inflation. If you don't want to be reduced to kibble by the time you get there, you have to manage your assets aggressively.

Here are four defensive strategies that Roy recommends.

Set priorities. Determine a strategy that is likely to allow you to cover the basics if you live to at least 90 -- 100 might be an even better number. Invest what's left to cover the things that aren't as important -- cruises and an inheritance for the kids.

Don't abandon stocks. Our parents kept their money in Treasuries, but we can't afford that. "We are recommending that investors compartmentalize their equities: Keep most holdings in defensive, dividend-paying stocks, but maintain some exposure to riskier assets to bolster long-term returns," Roy says.

Diversify your fixed income. Putting it all in bonds is another thing that probably worked for Mom, but these days diversification will help protect you from disasters no one can predict.

Keep moving. Setting-it-and-forgetting-it was a good-enough strategy when you were 30 and saving for retirement in the distant future. These days, you have to keep on top of your plan, and figure that in 20 years -- when you reach 85 -- you may have to rethink everything.

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