How Retirement Investors Can Protect Investments From Inflation

How have near-retirees and retirees allocated their investments in the wake of rising inflation? If investor surveys are right, many may be repeating mistakes of early 2020 and heading to cash, taking them out of the market at a time it could potentially rebound.

After the flash crash at the onset of the pandemic, many retail households pulled investments for cold hard cash as they saw pandemic closures grinding the world to a halt. The S&P 500 fell 34%, but then it rose 36% between Feb. 19 and May 31, 2020.

Vanguard research into retail household data and “cash panickers” found that 86% of people who fled to cash during the sharp sell-off missed out on the market rebound and lowered the value of their portfolios. Consulting with your financial advisor during times of market uncertainty can avoid snap decisions.

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The Road Ahead for Inflation

The Labor Department announced that inflation came in at an annual rate of 8.5% in August. Beneath the surface of consumers’ investment decisions remain some nagging, fundamental questions about risk trade-offs: What’s a smart way for retirement investors to grapple with inflation? What are some sensible investment strategies that can help sustain purchasing power in retirement without undue risk? As Adam Hetts, global head of portfolio construction and strategy at Janus Henderson, mentioned in a podcast on inflation: “The biggest portfolio risk for inflation might simply be an investor overreacting and allocating to a new set of risks they never had before.”

In mid-August, the Federal Reserve Bank of Philadelphia released a survey 35 professional forecasters regarding their outlook for inflation in 2022 and beyond. Their consensus view is that inflation will probably remain high in the near term; however, these forecasters expect inflation to gradually abate over the next 10 years to an average of 2.8%.

[Read: Does Current Market Volatility Mean It’s Time to Rebalance Your Portfolio?]

Is The 60/40 Model Still Viable?

This year, the Federal Reserve has sought to pare back inflation with successive rate hikes; we now have an effective Fed funds interest rate in the 2.25 to 2.5% range. Anytime the Federal Reserve raises rates, it typically creates volatility in the market. In fact, through June, we experienced the worst start to the year since 1970, with the S&P 500 down 20%.

For near-retirees and retirees who will need both income and growth from their investment portfolios over the next decade, this kind of market volatility has raised additional questions about whether the traditional framework of roughly 60% in stocks and 40% in bonds still makes sense. After all, as Fidelity referenced in its investment report “Why the 60/40 is Still In Play,” stocks and bonds are often highly correlated and move in the same direction in periods of high inflation, which diminishes bonds’ hedge protection if stock returns sour.

Risks abound on both sides of this paradigm, though: Sure, stocks can be volatile at times. But what if a retirement investor misses out on the growth they may need in the next decade — especially the kind that preserves purchasing power — by not having enough stocks in their portfolio?

According to Fidelity, a balanced model of 60% in stocks and 40% in bonds has consistently addressed these concerns over the last two decades with similar returns as an equities-only portfolio, yet with substantially less risk.

Returns % Standard Deviation %
60% Developed market equity and 40% investment-grade bonds 6.69 9.38
100% U.S. stocks 8.61 14.80
100% Global stocks outside of the U.S. 6.46 17.06

*Source is Fidelity historical data from July 1, 2001, through June 30, 2021.

3 Tips to Navigate Inflation in 2022 and Beyond

Beyond the portfolio metrics, what many retirement investors really want is enough dependable income to enjoy what will likely be a long hike in retirement. So, here are three tips to help navigate around inflation now — and other challenges down the road, as well.

1. Collaborate with a retirement specialist. Take time to search for the right financial advisor for you. There are many different types of advisors, some are fiduciaries and need to follow more rules to act in a client’s best interest. Financial professionals are available to help with estates, divorce, small businesses or specialize in advising doctors. The Department of Labor’s Employee Benefits Security Administration also offers some handy tips on how to select a competent financial professional.

2.Lean into the “Popeyes” within your portfolio. Much like the fictional character who is a strong ally to his friends, equities have a long track record of providing consistent aid to retirement investors. Innovation is the spinach that provides the necessary punching power retirement investors need over time. According to research from Hartford Funds, from March of 1973 to December of 2020, U.S equities have exceeded the rates of inflation 90% of the time when inflation was 3% or below and on an upward trend and 76% of the time when inflation was above 3% and on a downward trend.

3.Expand the borders of your income sources. Traditional income sources, such as high-credit quality corporate bonds, municipal bonds and Treasury bonds, can serve as excellent ballasts within a retirement portfolio. The S&P U.S. Aggregate Bond Index tracks these investment sources and, as of July 29, reflected an annual yield to maturity of 3.45%. That’s currently better than many prevailing bank offerings in the U.S. But to maintain a competitive edge in your income stream, consider adding other alternative sources.

Real estate investment trusts, or REITs, for example, currently yield more than 3%. Treasury inflation-protected securities, or TIPS, adjust for inflation and can offer investors some protection when inflation runs wild as well. But TIPS are not the best sources for income when inflation is moderate or low. Dividend companies in emerging-market equities currently yield between 3 and 7%. As REITs and emerging markets can be quite volatile, some investors could look to multi-asset income investments to gain access to these asset classes while mitigating some of the risk.

For what it’s worth, a variety of investment firms have recently issued their market outlooks for the next decade. The firms’ consensus view is that many companies across the globe will likely have moderate, positive earnings in the coming years, despite the current headwinds.

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How Retirement Investors Can Protect Investments From Inflation originally appeared on

Update 08/19/22: This story was published at an earlier date and has been updated with new information.

Correction 08/23/22: A previous version of this story had incorrectly stated the S&P’s year-to-date decline in June.

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