{"id":5757,"date":"2016-08-21T06:54:43","date_gmt":"2016-08-21T10:54:43","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=5757"},"modified":"2016-08-21T06:54:43","modified_gmt":"2016-08-21T10:54:43","slug":"find-retirement-income-that-rises-with-inflation","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=5757","title":{"rendered":"Find Retirement Income That Rises With Inflation"},"content":{"rendered":"
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\"images\"<\/a>One problem with being a retiree on a fixed income \u2014 it\u2019s a fixed<\/em> income. But living costs rise with inflation, so you\u2019ll want your investment income to do so, too.<\/p>\n

How can you? I\u2019ve talked with a few smart financial advisers and will share four of their suggestions momentarily.<\/p>\n

I realize inflation, overall, isn\u2019t much to worry about at the moment.<\/p>\n

Low Inflation Today, Higher Inflation Tomorrow?<\/h3>\n

Consumer prices jumped only 1 percent in the past year, according to the Labor Department<\/a>. That\u2019s well below the 1.7 percent average annual increase over the past decade<\/a>. But in some ways, this makes the possibility of an inflation threat going forward even more likely.<\/p>\n

86 percent of Americans are interested in a financial product offering guaranteed income for life plus the opportunity for income to increase over time.<\/p>\n

And the inflation rate for health care costs \u2014 a particular concern for retirees \u2014 is far above 1 percent. Lately, health care inflation <\/a>has been running around 3.6 percent.<\/p>\n

Read on PBS Next Avenue<\/a><\/strong><\/p>\n

What\u2019s more, the Federal Reserve has been hinting it will increase interest rates by the end of the year. It\u2019s hard to discount the notion that raising rates might eventually raise inflation.<\/p>\n

You don\u2019t have to be a financial genius to know that rising living costs can plunder your savings. Inflation impacts everything from the cost of your groceries to your prescriptions. When the dollars you pull from your retirement accounts are worth less, it stings.<\/p>\n

The Risk for Retirees<\/h3>\n

The risk for retirees, in particular, is significant. In years gone by, many traditional pensions<\/a> were indexed for inflation (as Social Security is). But now, many retirees rely on 401(k)s and IRAs, where there\u2019s no automatic tweaking to keep pace with inflation. In addition, people nearing retirement typically shift to bank certificates of deposit and bonds that lack inflation protection.<\/p>\n

\"Stein
Stein Olavsrud, FBB Capital Partners<\/figcaption><\/figure>\n

\u201cHistorically speaking, inflation has been between 3 and 3 1\/4 percent, on average,\u201d says Stein Olavsrud, a Certified Financial Planner and portfolio manager with FBB Capital Partners<\/a> in Bethesda. Md. \u201cSo history would tell us it is very likely we will see a surge of inflation again at some point in the future, and we need to know how to protect ourselves from it.\u201d<\/p>\n

Here\u2019s the tricky part: our longer lives.<\/p>\n

\u201cAs I look at retirees today who worry about outliving their money, it really comes down to what I define as \u2018longevity risk,\u2019\u201d says Olavsrud. \u201cHow are we able to generate enough income that both increases beyond the rate of inflation and at the same time generates enough of a return that they can retain their lifestyle without drawing down their assets?\u201d<\/p>\n

Here are four possibilities; I\u2019d recommend you consult with a financial adviser to determine what\u2019s best for you:<\/p>\n

1. Treasury Inflation-Protected Securities (TIPS)<\/h3>\n

These government-backed bonds are specifically designed to protect you from inflation. Their return is tied to the Consumer Price Index. If you\u2019re living on a fixed income, many experts I spoke to agree it\u2019s a good idea to have some TIPS<\/a> in a tax-deferred account.<\/p>\n

If you buy $100,000 in TIPS and inflation is 3 percent, your principal will be worth $103,000 by the end of a year. When TIPS mature, you get back the original principal amount or one that\u2019s been adjusted\u2014whichever is greater. TIPS pay interest every six months; the interest is exempt from state and local taxes, but subject to federal tax.<\/p>\n

You can buy TIPS at no fee directly from the U.S. Treasury in increments of $100. Alternatively, you can add TIPS to your portfolio by buying a mutual fund like Fidelity\u2019s Inflation-Protected Bond Fund<\/a> or Vanguard\u2019s Inflation-Protected Securities Fund Investor Shares<\/a> which purchase them.<\/p>\n

\u201cTIPS should be in a portfolio as someone is approaching retirement, I would say,\u201d says Olavsrud.<\/p>\n

2. Annuities<\/h3>\n

In a recent study<\/a> by Allianz Life Insurance Company of North America, 86 percent of Americans surveyed said they were interested in a financial product offering guaranteed income for life plus the opportunity for income to increase over time.<\/p>\n

\u201cOur study revealed that many people depend on an annual pay raise to cover various increasing expenses and even build long-term savings,\u201d said Allianz Life Vice President of Consumer Insights Katie Libbe. \u201cConsumers facing retirement will need to explore options that create a similar income strategy by using a portion of their portfolio to obtain guaranteed income for life with the chance for increases.<\/p>\n

This makes sense to me. And it\u2019s where annuities<\/a> can come into play (for the record, Allianz is a big annuity seller). Many annuities include a guaranteed income stream that increases over time.<\/p>\n

But you need to be willing to give up control of your investments and pay expenses that can sometimes gnaw away at your future earnings.<\/p>\n

Most annuities are sold by insurance brokers or other salespeople who collect a commission as high as 7 percent. Fee-based financial planners, however, can offer no-load annuity options without commission costs. Annual investment management fees will add 0.5 to 2 percent; fees for insurance riders can add 0.5 to 1.75 percent or so. Add them up, and you could be paying 2 to 3 percent a year, if not more.<\/p>\n

Moreover, many annuity contracts contain pricey surrender charges for pulling money out during the first several years you own one. The charge is typically about 7 percent of your account value if you withdraw after one year, declining by 1 percentage point per year until it gets to zero.<\/p>\n

\"Neil
Neil Krishnaswamy of Exencial Wealth Advisors<\/figcaption><\/figure>\n

\u201cSeeking a guaranteed type of inflation protection can be very costly protection, says Neil Krishnaswamy, a Certified Financial Planner at Exencial Wealth Advisors<\/a> in Plano, Texas.<\/p>\n

One other drawback with annuities today: low returns due to the low interest rates on the securities they buy. Says Olavsrud: \u201cThis ultra-low interest environment is not the best suited for locking in a low interest rate for the rest of your life.\u201d<\/p>\n

3. Stocks<\/h3>\n

While stocks don\u2019t offer any kind of guarantee, historically they\u2019ve been a good way to combat moderate to high inflation, says Krishnaswamy.<\/p>\n

\u201cOur research has shown that the more effective way to combat inflation is to be an investor in equities, which tend to provide cash flow that has the potential to rise over time with inflation,\u201d he says. Of course, they have their own set of risks.\u201d<\/p>\n

Even if a capricious market makes you uneasy, I think you can\u2019t afford to ignore stocks as an inflation hedge. History shows that stocks \u2014 unlike bonds \u2014have delivered solid growth over the long-term, after accounting for inflation. These days, it\u2019s probably realistic to expect stocks to return around 4 points a year above inflation.<\/p>\n

My rule for the percentage of your portfolio that should be in stocks: 110 minus your age. In other words, if you\u2019re 55, you\u2019d have 55 percent in stocks.<\/p>\n

You don\u2019t have to select individual stocks, of course. Buy a Standard & Poor\u2019s 500 index fund, anExchange Traded Fund<\/a> that tracks the S&P 500 or a total U.S. stock market index fund.<\/p>\n

The good news is that many S&P 500 stocks also pay dividends. So unlike bonds, they offer a twofer: they provide income with cash dividends (the S&P 500\u2019s dividend yield is now 2.02 percent) and there\u2019s the strong potential for capital appreciation. That\u2019s because their size and industry dominance can let them pass along rising costs to customers and keep profits healthy, says Olavsrud.<\/p>\n

4. Commercial Real Estate<\/h3>\n

This tangible asset is a buttress against inflation with one big benefit: it often moves in the opposite direction of stocks. That makes real estate investment trusts or REITS (stocks of companies that own or manage properties) attractive, as well as ETFs and mutual funds specializing in real estate securities.<\/p>\n

One low-cost way to hold real estate: the Vanguard REIT Index<\/a>, which tracks the U.S. REIT market.<\/p>\n

The Bottom Line<\/h3>\n

For retirees, every penny matters for steering though inflationary times. With one or more of these investments, you can build a portfolio providing you with protection and a pay raise.<\/p>\n