In case you haven't noticed, inflation has been rampant
lately. The cost of everything from gas to groceries to apparel has gone way
up, and we could be in for many more months of high consumer prices before
things start to settle down.
But while this recent bout of inflation is fairly extreme,
some degree of inflation is normal, especially over time. In fact, if you're
many years away from retirement, you can bet that pretty much all of your
expenses will end up rising substantially between now and the time you leave
the workforce for good.
If that's a concern of yours, it's understandable. Though
Social Security is designed to give seniors raises, known as cost-of-living
adjustments, to help them maintain their buying power in the face of inflation,
often, those raises fall short.
That's why it's important to take steps of your own to
combat inflation. And choosing the right investments could be your ticket to
doing just that.
An aggressive portfolio is the smart way to go
Ideally, you'll be saving for retirement in an IRA or 401(k)
plan so you have money at your disposal outside of Social Security later in
life. But it's important to invest your savings wisely to put yourself in a
strong position to maintain your buying power down the line.
To this end, loading up on stocks is a good bet. Though
stocks are risky, and they carry more risk than bonds, they also tend to
deliver higher returns. And you'll need those strong returns to grow your money
at a robust enough pace to beat or keep up with inflation.
Let's say you contribute $500 a month to a retirement plan
over a 40-year period. If you go heavy on stocks, it's fair to assume that
you'll generate an average annual 8% return, because that's a bit below the
stock market's average. Stick to that plan, and you'll end up with a little
over $1.5 million. That's a nice chunk of money to access at a time in your
life when earning money from a job may not be an option (or an option you want
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 up on S&P 500 index funds.
These funds are a good bet for a couple of 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). Also,
S&P 500 index funds in particular offer instant diversification, since they
effectively track the broad market.
Don't let inflation fears drag you down
Inflation is part of our economic cycle, but it also has the
potential to make retirement financially stressful. By investing your savings
strategically, you can do your part to give yourself an edge, even as the cost
of living climbs over time.
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