For Mark Roberts’ Use: If you’re saving for retirement, chances good that you’re focusing on meeting a particular savings goal before you can quit working. This dollar amount is probably based upon your expected living expenses, and the income you expect to receive by taking regular withdrawals from your retirement fund. But there’s another important factor to consider: the impact of inflation upon your budget and savings.
Inflation fluctuates, but it basically refers to the increase in prices of products and services over time. In the short term, you may notice that butter or bread cost a bit more than they did last year. In the long run, inflation will erode your purchasing power. The money you save today won’t go nearly as far when you retire later. You risk retiring without enough money to afford the lifestyle for which you planned and budgeted.
Luckily there are ways to protect yourself against inflation. Putting your money into growth-oriented savings vehicles, such as stocks, variable annuities, or a variable universal life insurance policy, will often help your money grow at a pace faster than inflation. This means that even as money in general will purchase less, your money grows quickly enough that you can still afford the same or better quality of life as you enjoyed before.
Of course, investment vehicles that grow quickly are generally the ones which carry more risk. It’s important to remember the value of diversification in your portfolio. Don’t invest so aggressively that you place all of your assets into high-risk situations, but avoid taking such a conservative approach that your assets don’t grow as needed. Be sure to communicate with your financial advisor about your particular risk tolerance, but always consider the growth you truly need in order to retire comfortably. Together you can formulate an investment strategy that hopefully outpaces inflation while protecting your principle assets.