Inflation: What is It?

Inflation is the slow and steady decline of a currency’s purchasing power. A secondary definition is that inflation is the steady increase in the price of goods over time.

The effects of inflation are so slow that it’s hard to notice them in real-time. It’s almost like watching a weed grow. If you stare at a weed then it will be almost impossible to see any progress. But, if you leave and return a few weeks later then it will be easy to see how much bigger the weed has gotten.

The average rate of inflation is usually around 2-3%. This means that the world is slowly creeping 2-3% more expensive each year. However, the rate of inflation can sometimes go as high as 5% or more. Now, inflation doesn’t directly impact your retirement account. But, it impacts you indirectly by making the world around you more expensive.

How expensive will life be in 2050 ?

If you’re in denial that the world is getting more expensive, just look up the prices of everyday goods over the past few decades. For example, the average price of a house in 1980 was $47,200. Today, it’s $348,000. This example applies to the costs of energy, food, gas, and more.

Depending on your age, you can probably even just think back to your younger years and reminisce on how cheap things were. When you retire, it’s important to remember that this inflation is typically constant in our society.

If you retire around age 65, then you need to be prepared for a higher cost of living when you are 75, 85, or 95. Being on a purely fixed income may be a good strategy when you are 65. But, that same income will likely grow thinner each year that you’re retired.

With that said, let’s examine 3 strategies to protect your wealth during your retirement.

You should give managing your retirement portfolio the same attention that you give your car. Some investors will take pride in constantly managing their portfolio, just like some car owners are constantly tending to their cars. That doesn’t mean that need to check under the hood every single day. But, you should be checking in at least every couple of months to make sure that things are running smoothly.

Since economic factors are constantly changing, you should always be adjusting your portfolio to compensate for new risks/opportunities. For example, the COVID-19 pandemic presented an enormous risk for many retirement accounts. The world was shut down for months and commerce ground to a halt. Forward-thinking investors would have been savvy to wind down their risk during this period to ensure that they didn’t lose their nest egg.

But, it’s not all about hiding from risks. There is also a lot of potential upside to adjusting your portfolio.

Even though you’re retired, you shouldn’t be afraid to take small risks here and there when the opportunity presents itself. However, you also don’t want to take a risk that jeopardizes your retirement.

Since everyone has a different risk tolerance, we’d recommend consulting with a financial professional for more personalized advice. Or, you can also consider investing in assets where you have more control.

Many retirement plans are reliant on the returns of the stock market. This is a solid investment strategy because the stock market is one of the best creators of wealth in history. But, the prices of stocks are also totally out of your control.

You can’t influence what an executive at a major company does. You also can’t influence if the U.S. goes to war with another country. But, on the flip side, both of these elements can influence your retirement account.

Instead of being reliant on stock market investments, retirees would be well advised to allocate a portion of their net worth to real estate. Here’s why:

Many retirement plans are reliant on the returns of the stock market. This is a solid investment strategy because the stock market is one of the best creators of wealth in history. But, the prices of stocks are also totally out of your control.

You can’t influence what an executive at a major company does. You also can’t influence if the U.S. goes to war with another country. But, on the flip side, both of these elements can influence your retirement account.

Instead of being reliant on stock market investments, retirees would be well advised to allocate a portion of their net worth to real estate. Here’s why:

• I.D.E.A.L -This is a quick trick that describes all the advantages of investing real estate and stands for income, depreciation, equity, appreciation, and leverage. In other words, real estate is valuable because it can generate cash flow and grow your net worth (income/appreciation). Additionally, it can also save you money on taxes through depreciation. Finally, you can balance your leverage in a property to contribute less equity and make a larger return on your cash.
• Cash Flow -Real estate is one of few assets that can reliably generate passive income each month. This is much more reliable than government programs or stock dividends, which can both be eliminated without your consent.
• Tax Benefits -Owning real estate allows you to tap into a vast arsenal of tax benefits. In fact, you’re even able to generate a profit off your property while legally reducing your taxable income!
• Inflation-protected -Finally, most importantly, real estate is an inflation-protected asset. By this, we mean that you can just increase the rent that you charge each year to keep pace with inflation. Voila! One of the best ways to protect your wealth from inflation during your retirement.