Most retirees anticipate inflation creeping up by 2% each year, as that’s a historically normal rate. But when inflation spikes to 9% like it did in 2022, retirees can be caught off guard. While higher cost of living adjustments can help, Social Security benefits can’t always keep up.
Stocks and bonds lost value amid the high inflation in 2022, but gold and other commodities appreciated. Inflation doesn’t always stay low, and preparing for a year of high inflation can minimize your losses.
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What inflation does to a retirement portfolio
Higher inflation rates increase bond yields, which is good news if you are shopping around for new bonds. However, higher yields for new bonds also make existing bonds less valuable. That may be fine if you can hold your bonds until maturity, but if you have to sell your bonds, you won’t get as much money for them.
Stocks tend to struggle amid high inflation since operating costs go up and consumers have less purchasing power. (However, equities focused on energy and commodities can do well in this environment.)
Cash is guaranteed to lose value each year due to inflation, so it’s not exactly a haven for economic uncertainty. While its nominal value stays the same, its purchasing power will go down. A $1,000 balance isn’t as useful now as it was 10 years ago. While the cost of living adjustment will boost Social Security benefits, it often lags inflation, especially in specific categories like housing and healthcare expenses.
How much to invest in gold — and in what form
Many experts suggest allocating 5% to 10% of your portfolio to gold and other assets that are designed to protect you from inflation. You may not have a large enough hedge if less than 5% of your assets are inflation-resistant, but overconcentrating in gold leaves you subject to the asset’s volatility. Although gold is viewed as a haven from inflation and economic uncertainty, it is still subject to sharp price swings.
Gold bullion is one solid option, and you can accumulate this asset in a tax-advantaged gold individual retirement account (IRA). However, gold exchange-traded funds (ETFs) are one of the easiest ways to get started and require no physical storage. These ETFs are available to purchase in your regular taxable brokerage accounts as well as retirement accounts.
Where People Are Buying Gold Right Now
What 2022 taught retirement savers
Stocks and bonds both fell in 2022, and that outcome taught many retirees that they may need something other than the classic stock-and-bond portfolio to shield themselves from every risk. Energy stocks, commodities, real estate and gold actually held up in 2022, showing investors multiple avenues of risk reduction that can minimize losses during scorching inflation.
Diversifying across multiple asset classes that are built for different economic cycles can give your retirement portfolio enough hedges to withstand inflation and uncertainty.
A simple self-test
Investors should review their portfolio regularly, like twice a year, to make sure it aligns with their financial goals. Those who are concerned about inflation should review what percentage of their portfolio is allocated toward assets that benefit from inflation or can hold steady.
Investors who are overconcentrated in stocks and bonds leave themselves exposed to high inflation rates in the future. These individuals can benefit from accumulating gold, commodities and other inflation hedges. You don’t have to reconstruct your entire portfolio, but having 5% to 10% of your portfolio in these types of investments can come a long way if we get another year like 2022.
