IIn case you haven’t noticed, inflation has been rampant lately. The cost of everything from gasoline to groceries to clothing has increased dramatically, and we could end up in many months of high consumer prices before things start to calm down.
But while this recent bout of inflation is quite extreme, some degree of inflation is normal, especially over time. In fact, if you’re several years away from retirement, you can bet that almost all of your expenses will increase dramatically by the time you leave the workforce for good.
If this is of concern to you, that’s understandable. Although Social Security is designed to give increases to older people, known as cost-of-living adjustments, to help them maintain their purchasing power in the face of inflation, these increases are often insufficient.
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That is why it is important to take your own steps to fight inflation. And choosing the right investments could be your ticket to getting there.
An aggressive portfolio is the smart way to go
Ideally, you will save for your retirement in an IRA or 401 (k) plan so that you have money available to you outside of Social Security later in life. But it’s important to invest your savings wisely to put yourself in a strong position and maintain your purchasing power across the board.
To this end, stocking up on inventory is a good bet. While stocks are risky and carry more risk than bonds, they also tend to generate higher returns. And you’ll need those high returns to grow your money at a rate that is strong enough to beat or keep up with inflation.
Let’s say you contribute $ 500 per month to a retirement plan over 40 years. If you bet a lot in stocks, it is fair to assume that you will generate an average annual return of 8%, as that is a bit below the stock market average. Stick to that plan and you’ll end up with just over $ 1.5 million. It’s a nice amount of money to step into at a time in your life when making money with a job might not be an option (or an option you want to exercise).
If you have an IRA, you can invest your savings in individual stocks. If you have a 401 (k) plan, you won’t be able to buy individual stocks, but you can try loading on S&P 500 index funds.
These funds are a good bet for several reasons. First, because all index funds are passively managed, they tend to charge very low fees (unlike some of the other funds you might find in your 401 (k) plan). Additionally, S&P 500 index funds in particular offer instant diversification, as they effectively track the overall market.
Don’t let inflation fears drag you down
Inflation is part of our business cycle, but it also has the potential to make retirement financially stressful. By strategically investing your savings, you can do your part to give yourself an edge, even as the cost of living increases over time.
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