Don't neglect to factor inflation into your retirement planning because it is almost certain to be a factor.
Bill Simon, president and CEO of Walmart U.S., told USA Today that inflation is "going to be serious. ... We're seeing cost increases starting to come through at a pretty rapid rate."
Heaven knows, if Walmart is worried about inflation, the rest of us are going to feel the pain, too.
What can we do to protect ourselves from inflation as we head into retirement? Here are three things to consider:
- Buy TIPS. Treasury inflation-protected securities are guaranteed to keep up with inflation and -- if we're all wrong -- give you a hedge against deflation. TIPS are auctioned with five-, 10- and 20-year maturities at a fixed interest rate, but the interest payments adjust because the principal reflects inflation. For instance, if you buy a $1,000 TIPS bond at a 2 percent coupon rate, it will earn $20 per year. If there is 3 percent inflation, the principal increases 3 percent and the interest payment rises to $20.60. When the bond matures, the face value of the bond reflects inflation. Assuming 3 percent annual inflation, a 20-year TIPS bond with a face value of $1,000 will be worth $1,800 at maturity. If there is deflation, the bond is guaranteed not to fall below its original face value.
- Maximize your Social Security benefit. Social Security is indexed for inflation. If you hold off taking it until you are full retirement age -- or better yet, age 70 -- you'll earn substantially more to start out with and any inflation adjustments will be a greater asset.
- Invest part of your savings in commodities and energy. Even when times are tough, people do their best to pay the power bill and keep food on the table.
And here's some overall advice. Interest rates have been very low for a couple of years, but they won't stay this way forever -- even if it feels like it now. As you invest your retirement nest egg, avoid locking into 20 or 30 years of rock-bottom returns by sticking with shorter-term investments and laddering them so when inflation hits, you can roll your money over into something higher paying.
That may feel risky, but it's less risky than having no hedge against inflation.