I'm Retiring: What Should My Inflation-Proof Portfolio Look Like?

You're not imagining it: a buck really did use to stretch further. In times of high inflation, your purchasing power can rapidly disappear. Even with the Federal Reserve raising interest rates to cool off the inflation surge, it will be years before our economy recovers from the impact of Covid.

When prices are increasing, but wages aren't, the standard of living goes down. And if you're retired and living on a fixed income, the loss of that purchasing power can be devastating. That's why you need to protect it.

The face value of a currency says one thing, but its real value is what you can buy with it. For retirees, this is true even if inflation returns to normal levels. The actual money you’ll need to save for retirement is likely more than you might think to keep up with the cost of living.

Healthcare costs are a good example. While they are more modestly impacted by inflation (the cost of medical care services only increased 4.0% from May 2021 to May 2022), healthcare costs will still increase, and obviously it is only going to get more expensive as we age.

So how do you protect the real value of your savings from inflation? If you're retired or nearing retirement, an inflation-proof portfolio is a must.

The best way to achieve one is by diversifying your investments and owning a mix of stocks, bonds, real estate and cash equivalents. Here's a closer look at each asset class and how it can help insulate your portfolio:

Stocks: While stocks are often more volatile than other asset classes in the short-run, they have the potential to provide superior returns over the long haul. That's why stocks should make up a significant portion of an inflation-proof portfolio. Look for stocks that grow from a rise in inflation (inflation-correlated investments), such as energy sector equities.

Bonds: When inflation is on the rise, bonds tend to lose value. That's because the fixed payments they offer aren’t worth as much when prices are rising. However, bonds can still play an important role in an inflation-proof portfolio. They offer stability and can help offset losses from other investments. Consider investing in inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS) or Series I bonds. These are special bonds issued by the US government that offer protection against inflation. The principal and interest payments on these bonds adjust according to the Consumer Price Index (CPI), so they keep pace with the cost of living. These bonds can be bought individually or as part of a mutual fund or ETF.

Real estate: An asset class that typically does well in inflationary times is real estate. Both the value of property increases as does rental income. To capitalize on this, you can use equity in your home or rental property to supplement income if your investments have taken a large loss or rely on increased rent as these will be rising across the board. Or if you don’t have an investment property, holding real estate-specific mutual fund or ETFs can give you access to the same benefits. One thing to watch out for is that real estate investment funds aren’t tax-efficient, so it’s best to keep them in a tax-deferred or tax-free investment account.

Cash equivalents: Cash equivalents are assets that can be converted to cash, such as money market funds and short-term CDs. They offer stability and can cover expenses in the short-run if other investments lose value.

While there's no guaranteed way to completely protect your portfolio from inflation, diversifying your investments is key to minimizing those risks and maximizing your chances for success. By owning a mix of stocks, bonds, real estate and cash equivalents, you can help ensure that your portfolio will be able to weather the storm. Even if inflation does take a bite out of your returns, you'll still be able to sleep soundly at night knowing that your investments are diversified and well-protected. So don't put all your faith in one investment; diversify your portfolio and enjoy the peace of mind that comes with knowing you've done everything you can to protect your hard-earned money.

To read more about Treasury Inflation-Protected Bonds (TIPS) from Chicago-Fee Only advisor Bob Finley, go here.