Retirement is hard these days, and inflation rates have to be considered, which some retirees fail to take into account. Because of the pandemic, inflation rates rose from 3.13% through 2019 to 5.4% currently during tenuous economic conditions. It is important to understand that a 2% inflation rate decreases your purchasing power by 50% over 20 years and increases your cost of living.
Private pensions do not usually adjust for inflation, although, most federal and state pensions do. This is why you should consider some strategies to protect yourself against inflation for your assets that will minimize risk. We have four ways that you can accomplish this.
Consider Real Estate Investment Trusts
REITs are considered a stock portfolio that has real estate holdings. These are the companies that finance or own real estate that can produce income through owning or financing different kinds of properties. However, most of these will focus on one type of property like apartments, offices, of industrial sites. Some others may choose to concentrate on several different types of property, while some only do mortgages.
In the United States, if a company becomes an REIT, the rule is that it has to disperse at least 90% of the income (net) from those properties as dividends. In exchange for that, the government allows that all of that income that is related to the properties is exempt from federal income taxes. You can also trade REITs like stocks, while allowing investors to put money into real estate without the hassle of tenant and maintenance issues.
Invest in Dividend Aristocrats
These are companies that are in the S&P 500 that increase their dividends at least once a year, and for at least 25 years. For 2021, there are 65 such companies, like ExxonMobil (XOM) and Johnson & Johnson (JNJ). If you consider yourself risk-tolerant, you can buy individual stocks, or if you are risk-averse, you can buy a dividend-aristocrat exchange-traded fund like the ProShares S&P 500 Dividend Aristocrats Index (NOBL). No matter where your comfort level resides about stocks, dividend aristocrats can give you the extra income that you need to offset inflation.
Treasury Inflation-Protected Securities
These TIPS, as they are referred to, are bonds from the U.S. Treasury. The reason that they are different from other bonds is that their principal amount adjusts with inflation, and can even fall with deflation. The principal amount of the bond is related to the consumer price index. Biannually, TIPS regulate the amount of principal in relation to the CPI and pay interest on the new principal.
There are other benefits to TIPS as well. Because they are from the U.S. Treasury, there is not a risk that they will default. Also, in the event of deflation, TIPS guarantee the entire amount of the principal when the bond matures.
A commodity can be anything from electricity to gold bars. They are partially or unprocessed goods that are valuable resources. Now, that doesn’t mean that you should go around purchasing and storing things like cotton and corn under your bed, but you should look at general commodity ETFs.
The biggest one of these is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF, which has over $6.2 billion in assets. This fund and funds like it own many different commodities. In time, the monetary value of the fund rises as the dollar loses value.
Also, these diversified funds can protect you as the investor if an individual commodity crashes. As an added bonus, you will have the advantage that when commodity prices rise, you will have the convenience of a brokerage account.
* The information in this article is not meant to be specific financial advice. Always talk to a qualified financial professional before making any major decisions.