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Retirees: Inflation Protection for Retirement Portfolios

Retirement Planning Ann Arbor

Retirees and pre-retirees have been challenged by theinvesting environment during the past few years. As it becomes harder to generate a livable income streamfrom retirement portfolios given the low bond yields,retirees have to choose between tapping their principaland venturing into high-yielding, but also riskier,securities. Inventors are concerned about what couldhappen to their bond portfolios if interest rates were to rise.

While inflation currently appears to be in line withhistorical norms, retirees remain concerned about thepotential for rising inflation and its effect on theirportfolios. Inflation-linked securities like TreasuryInflation-Protected Securities (TIPS) are the mostdirect way to hedge against inflation. But even investorswho are convinced that TIPS are a good place to be stillhave questions about implementation.

Certified Financial Planner Ann Arbor

Here is why inflation protection is important forretirement portfolios. Retirees miss out on some of theinflation protection that working people normally enjoy.Paychecks will generally trend upward to keep pace withrising prices but retirees don’t have that safety net. SocialSecurity payments are adjusted upward in an effort tokeep pace with rising prices. But to the extent that aretiree is living off a portfolio anchored in fixed-rateinvestments, the payout from that sleeve of the portfoliowill be fixed. If prices go up, the purchasing power ofthat portfolio, and in turn the retiree’s standard of living,goes down.

Wealth Management Ann Arbor

This is why inflation-indexed securities likeTIPS, whose principal values adjust upward to keep pacewith inflation, are an important part of a retiree’s fixedincome portfolio. TIPS are guaranteed by the full faith and credit of theU.S. government as to the timely payment of principaland interest. However, TIPS are subject to unique risks, mostnotably liquidity risk and inflation risk. Please consult with your investment advisor before making any decisions about investing in TIPS or other financial instruments.

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