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Apr 8, 20225 min

How to Protect Your Retirement from Inflation

Who needs inflation, right? Especially when it comes to accessing your nest egg in retirement. Inflation rising to anything over 5% doesn’t spell good news for, well, most people looking to build a little pot of gold for the future. But there’s no need to hit the panic button just yet, and we’ve got some handy tips for how to protect your retirement nest egg from rising prices.

Just what is inflation?

When prices of goods and services increase steadily, you’ve got yourself inflation. During times of inflation, your money is worth less and, subsequently, buys a smaller percentage of those goods and services that have increased. It means that you lose some purchasing power.

In general, inflation is fairly steady in the US, and the Fed tries to keep it at a rate of 2% every year. However, inflation is affected by world events, some of which are hard to plan for. In layman’s terms, economic turmoil, like the Covid pandemic, often leads to a drop in inflation. While moments of great prosperity usually lead to a rise in inflation.

How does inflation affect my retirement nest egg?

If you’ve built up your retirement pot over 30 years, the money put in at the beginning won’t be worth the same amount when the time comes to withdraw it. If there’s regular inflation while you’re saving, then you could see your savings account impacted.

For example, a $250,000 retirement nest egg today would devalue by $7,500 in one year with inflation of 3%. That would give it only $175,000 of purchasing power in just 10 years. That’s why it’s important to factor in inflation when saving.

How to protect your retirement nest egg against inflation

Manage risk

Nothing is certain when it comes to investing, and it's impossible to predict the rate at which prices rise in the future. As a rule of thumb, however, it's best to assume there will be some type of inflation in the long term. Therefore, you should take the necessary steps to protect yourself from it. Manage the risk by diversifying, as it can help you protect yourself. Look to invest in various asset classes, as doing so can safeguard you against losing money because of rising inflation.

Examine the stock market

Share prices tend to outpace inflation by a significant margin, which makes investing in stocks appealing. Inflation averages just over 3% long-term, with the average annual returns in the stock market getting much closer to 10%. That would see you enjoying a purchasing power return of around 7%. Stocks and bonds can be a savvy investment type as long as you’re prepared the market volatility.

Buy gold

You read that right. This isn’t the 1800s, and gold is a viable alternative for trying to combat inflation. It typically rises in value in the most extreme economic conditions, with the pandemic being a good indicator of gold prices shooting through the roof. The spot price of gold achieved its all-time peak in August 2020, reaching a value of $2m-plus as a result of investors worrying about the economic fallout from Covid. Like stocks, it’s also somewhat volatile, which is why experts suggest you only keep a maximum of 5% of your wealth invested in gold.

Focus on inflation-protected annuities

With an annuity, you can purchase a future stream of payments from an insurance company. It's popular with life insurance riders and sees you using a single cash payment or making a monthly payment into the contract over a period of time. The contract details things like the rate of return and size of income payments, giving you a better indication of what you could earn from it. Going down the annuity route can be more complicated than other methods, but it can be a viable way to protect your nest egg retirement from dipping in value.

Avoid unnecessary taxes

Taxes can further impact your money when the time comes to withdraw it, so look to investment types that don’t charge you capital gains tax, such as a permanent life insurance policy. You grow your funds (more on that in a bit) in a tax-free environment, which means you can have a buy and hold option instead of actively purchasing and trading stocks. But that’s not the only way a permanent life insurance policy can help your retirement nest egg. We’ve got more about why this coverage can combat inflation below.

Safeguarding against inflation with permanent life insurance

There are several ways to protect yourself against inflation, including getting a permanent life insurance policy. With perm life insurance, you can build wealth while you’re still alive, growing both your death benefit and your money at the same time.

If you took out an indexed universal life insurance policy, you could grow your savings at an average return of 6-8% with a cap and a 0% floor. It works with part of your premium covering the death benefit and the rest going to an account that grows anywhere between 0-12% annually.

So if the S&P 500 rises above 12%, you’ll only get 12%. But let's say the market drops instead. It also means you won’t lose money, and you’re growing off of a higher amount each year because you don’t suffer any losses. As a result, you’re protected against inflation and can look forward to cash accumulation in the long term and a secure nest egg.

In conclusion: A retirement nest egg you can count on

Inflation can have an adverse effect on your retirement nest egg, but there are ways to protect your savings. You do have options, and if you make the right moves you can build up a nest egg to live off while looking forward to the future.

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