Defined Contribution

Why inflation still matters

Jul 8, 2016
By BlackRock

Even modest inflation can put a dent in retirees’ purchasing power. Learn how you can help to hedge against this risk.


Brexit, volatile markets and political acrimony: Who has time to worry about inflation?

The answer should be, everyone saving for retirement. It may be 70 years or more between a participant’s first contribution to her workplace plan and her final retirement drawdown, which is plenty of time for even modest inflation to have a massively corrosive effect on purchasing power. And, the risk is heightened after retirement, when there is likely no wage income to help offset losses to purchasing power.

Inflation destroys
purchasing power

Even with recent historically low inflation levels, the value of cash declined 9% from 2005-2009, while the cost of many big-ticket expenses, including health insurance premiums, college tuition, gasoline and food rose significantly.

Chart: Cost risings as cash value assets

And that's with modest levels of inflation. If we extend the view back to the 1970s for a look at the historical rate of inflation, however, we find that it would require $1.00 today to match the purchasing power of $0.15 in 1969.1 Assuming the same rate of inflation experienced during this timeframe, a 28 year-old participant would need to consider that the lunch that costs her $12.00 today would cost $77.86 by the time she's 75 years old.

LifePath®, BlackRock's target date fund platform, uses a combination of real
assets – real estate investment trusts (REITs), commodities and treasury inflation-protected securities (TIPS) –  to seek to preserve purchasing power in retirement and protect against inflation shocks during the accumulation phase.

Combining real assets offers total inflation protection

Commodities, REITs and TIPS may provide varying levels of inflation protection over different time horizons. By allocating to a combination of these assets over the course of a participant's working life and retirement, our goal is to create a glidepath that sufficiently protects the participant in multiple increasing and non-increasing inflation environments. The time horizon protection is aligned as follows:


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Since commodity prices are a direct input into the Consumer Price Index, commodities tend to be a very strong short-term inflation hedge.


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TIPS are, by design, an inflation hedge, best reflecting inflation expectations over both short and medium-term horizons.


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Real estate securities offer investors with a longer time horizon the opportunity for real returns with correlation to inflation.

We believe that a relatively small allocation to commodities should sufficiently manage much of an investor's exposure to short term fluctuations in inflation. Therefore LifePath maintains a consistent minority position to commodities throughout the glidepath. However, we shift the weighting from the long term protection of REITs into TIPS over the course of a participant's working life to better position the portfolio for retirement.

Lifepath's real asset allocation over time

The bottom line

The inflation environment is now at historical lows. However, given the potentially significant negative impact that even moderate inflation can have on retirement investors, especially those who have few to no working years left, we believe including real assets in target date funds is essential to protect participants. While each individual asset class has unique inflation-hedging properties, REITs, TIPS, and commodities combined can provide a more comprehensive portfolio solution for participants.