Can You Really Inflation-Proof Your Retirement Fund?

Since the Consumer Price Index (CPI) is very high, having risen ​8.5 percent​ in 12 months, and with the Federal Reserve making monetary policy changes to raise interest rates, many Americans are concerned about their retirement portfolios.ven at a low rate, inflation hurts your purchasing power so that your retirement money doesn't stretch as far to cover your expenses. Fortunately, you can take some steps to inflation-proof your savings by understanding which asset classes to choose during higher inflation and considering your portfolio allocation.

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In an inflationary environment, certain investments – especially more conservative ones – particularly struggle to offer a good return. For example, if you keep your savings in a regular savings account or a five-year certificate of deposit, the national average interest rates in April 2022 run very low at ​0.06 percent​ and ​0.32 percent​, respectively. That's far below even a modest 2 percent inflation rate.

At the same time, fixed-income investments, such as investment-grade bonds, also tend to see negative effects from inflation, especially if they're long term. The same applies to emerging market stocks and developed foreign stocks that demonstrate a negative relationship to rising inflation rates.

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If you're looking for inflation hedge options for your investment portfolio, some of the best investments will come with a higher risk and may be more volatile. Some options include:

• ​Real estate investment trusts (REITs)​: Real estate values usually increase during inflation. That means you could get a reliable return from a REIT that makes income from real estate investments and provides you with dividend income. Similar options include real estate mutual funds and exchange-traded funds (ETFs).
• ​Treasury inflation-protected securities (TIPS)​: If you're looking for government-grade bonds that adjust based on the inflation rate, consider this type of U.S. Treasury bond. The TIPS interest rate can raise for inflation or drop during deflation until maturity or its sale date, so returns will vary. However, you usually don't need to worry about default.
• ​Certain stocks​: Especially when you're investing for the long term, choosing stocks involves more volatility but is often a profitable option. When inflation rises, value stocks can offer better results than growth stocks due to having lessened effects from interest rate changes. You can also choose stock market investments in industries that perform well in high inflation, such as consumer staples, energy, real estate and financials.
• ​Short-Term bonds​: Going with short-term bonds can be a good option during high inflation since there's less risk of loss due to interest rate changes. The high liquidity is also helpful since you could reinvest sooner for a better return.
• ​Series I savings bonds​: As an alternative to TIPS, Series I savings bonds are a good choice when you want very low risk. They have an interest rate that consists of an inflation-adjusted rate and a fixed rate.

Fortunately, you can take some steps to inflation-proof your savings by understanding which asset classes to choose during higher inflation and considering your portfolio allocation.

Some other types of investments may help during high inflation but come with less predictable results. For example, the past performance of cryptocurrency options, like Bitcoin, has involved major ups and downs, and not enough is yet known about cryptocurrency's reliability during inflationary periods. In addition, precious metals, such as gold, are popular investments to try to beat inflation, but they offer less stability and can be harder to sell.

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Changing your investment allocation to try to inflation-proof your retirement fund comes with pros and cons, so it's best to do so with the help of a financial adviser. Factors such as your age, risk tolerance and desired retirement savings amount all play a role in the right investments for you. For example, you might decide to just stick with more conservative investments – despite the risk of inflation – if you're nearing retirement than to move to an allocation with riskier stocks.

In any case, a good plan is to create a diverse portfolio with several types of inflation-resistant investments alongside others that can offer stable returns. However, understand there's no promise on how the investments will do against the rate of inflation over the long term. That means you'll want to stay informed of market changes and check your portfolio periodically.

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