What is inflation?
Inflation is a continued increase in the cost of goods and services. If those increases in prices are large and sustained, it can greatly erode the purchasing power of your savings. That means you get less for your dollar. On the other hand, low levels of inflation can also be considered harmful by economists as it can slow growth and depress wages, sometimes even leading to a recession.
When economists talk about inflation, they typically think of it in two ways: expected and unexpected inflation. Expected inflation is just that, the normal level of inflation we’d expect to see. While there is no official rate deemed normal, policy makers and economists generally accept that a healthy target is at or slightly below two percent.1 Unexpected or shock inflation can be loosely defined as inflation above the expected level, especially if it occurs within a relatively brief period.
It can be hard to predict what levels of inflation will occur in the future since it’s impacted by a variety of factors, but there are actions you can take to help combat it. That may include investing your savings and being mindful of your goals.
Ways to help preserve your retirement savings against inflation
There are ways to help protect your long-term savings from the effects of inflation. First, consider whether your savings should be invested as opposed to just kept in a savings account. Funds that are kept in cash will likely decrease in relative value over time. Accounts or investments with low interest and returns may not offer much benefit either.
That’s why it’s important to examine the “real return” on investments. This is the rate of return minus the rate of inflation to quantify the increase in value of your savings. Investing in assets like equities and alternatives can potentially help as they may generate higher returns compared to other strategies. These gains can offset inflation.
In periods of high inflation, considering certain inflation hedging assets may also be beneficial. That’s especially true as you get older and closer to retirement. But know that returns on most commonly invested asset classes in addition to increases in wages will often outpace inflation. It’s a consideration that younger investors might keep in mind.
When it comes to investing for retirement, a target date fund can help manage inflation concerns and appropriately adjust exposure to different asset classes. A financial advisor can also provide advice that is suited to your specific needs and concerns related to inflation.
How can inflation impact your retirement goals?
During periods of higher inflation, you likely feel the impact on trips to the grocery store or at the gas pump. Increased costs can strain your budget today, and also impact the amount you’ll need to save for tomorrow.
The good news? Investing your savings could help you beat inflation and preserve their value and growth. You may want to consider adjusting your savings goals as well to reflect the changing economic landscape. That may mean aiming to set aside extra savings for retirement if you anticipate needing more. Just as your budget today changes in periods of high inflation, so could spending needs in the long-term for your desired standard of living.
