by Richard E. Reyes, CFP
Recent economic data in the U.S shows inflation being under control. However, inflation is a sleeping giant and it could probably be awakening soon and it’s a good idea to review your retirement portfolio and income portfolio to make sure that you are not caught off guard.
Inflation defined basically means that the prices for goods and services is rising while purchasing power is falling. Too much money chasing too few goods. Scarcity could be caused by many different issues, but the end result is the same. Your money buys less things.
The key to dealing with inflation is having a flexible portfolio and plan. When making investments or evaluating your existing holdings in potentially inflationary times you need to keep two things in mind:
The possibility of higher interest rates
The erosion buying power – how much you can buy with your money.
So what should you avoid?
Investors who really get hurt by inflation are those who have locked in very long term 10 to 15 years, low yielding fixed income securities like CD’s, bonds, and annuities or other long term instruments like long term debt funds.
This could definitely be cause of great concern for today’s retirees who have not put together a prudent income plan for their retirement and have locked in to very long term instruments in order to get a higher interest in this low interest rate environment.
In addition, although exposure to stocks is always good especially during periods of inflation, one should avoid exposure to individual stocks due to the fact that we never know how an individual company will be affected during these times.
Hard assets such as real estate have in the past been a hedge against inflation. However, with the recent real estate concerns of added foreclosures, less available lending and lower prices. It could not be a great short-term hedge this time around.
Additionally, Gold has also been a great hedge in the past against inflation. However, during the last two years gold has made a rapid rise and I am not sure how much legs it still has.
So what should you have in your portfolio?
When it comes to investing in any environment, one has to keep in mind that it is only a plan that will be a true measure of our success. Although we know that there are certain investments that are poised to do well during an inflationary cycle we don’t want to over evaluate and make short-term decisions that will have long-term effects on our financial picture.
Prudent globally diversified low cost portfolio allocated over a variety short-term fixed income and a variety of stock indexes tilted toward small cap and value stocks over the long-term has proven to be a great hedge vs. inflation.
In addition, if you are retired and are generating income from your portfolio to maintain your standard of living, you have to make sure that you have the right plan that will allow you to continue taking the appropriate amount of income, especially inflation protected income during any economic environment whether we have inflation or not. Basically, this approach to proper income distribution planning revolves around putting together a plan that uses multiple investments, divided into multiple time frames, and some income guarantees. This approach strategically combines shifting risk and investments to achieve Reliability of Income and better be able to manage your emotions at retirement.
Folks – You only get “one” retirement and you need to get it right. You need to find yourself a financial advisor that can demonstrate expertise in retirement income planning. It may require that you change advisors, just like you would change doctors, if your current physician was not able to treat your condition.
Remember , Retirees don’t go to Publix with your financial statements; you go with your check book. Your life savings is at risk. So make sure you have the right plan!
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Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com.