2018 Inflation Awakening
If you are an income investor, consider how inflation can affect your standard of living. Since the last recession almost a decade ago, inflation has barely made a dent in Americans’ income. In October 2017, $1.17 bought what $1 would have in January 2009, as measured by the Consumer Price Index. Not too bad, right?
Inflation Shrinks Income
The past decade produced historically low inflation, but you can’t count on this forever. Relatively recent experience shows it’s not uncommon to see sustained higher inflation, according to www.calculator.net. And you don’t have to be too old to remember the double-digit inflation of 1979 through 1981.
Consider that 3% annual inflation over 20 years would mean you would need $1.81 to equal the purchasing power of $1 today. So, you can see how even a moderate increase in inflation can wreak havoc on fixed income investors’ portfolios. How do you lessen this risk?
Increase Your Income
Your ability to lessen inflation’s impact can be summed up in three words: Increase your income. If you’re working, you might negotiate for higher-than-normal pay raises, but this too can have consequences. Think about how employers meet their rising costs by increasing the prices of their goods and services, which in turn will contribute to potentially higher inflation. It’s a vicious circle.
Alternately, consider how you might invest with inflation in mind. If you have a long time horizon, you might weigh increasing your equity investments against their increased risk.
If you want less risk and some inflation protection, you might put some money into Treasury Inflation-Protected Securities (TIPS). When TIPS mature (in five, 10 or 30 years), the U.S. Treasury pays the adjusted principal or original principal, whichever is greater. You can buy TIPS from a bank, a broker or direct at www.treasurydirect.gov.
Safe Can be Risky
Even in retirement, you might consider devoting some of your portfolio to growth investments to maintain your purchasing power. Ignore inflation at your own peril.
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