When you think about your money, it’s comforting to believe it’s safe in the bank, especially with the Federal Deposit Insurance Corporation (FDIC) protecting deposits up to certain limits. While this security ensures your principal is protected, there’s another layer of financial risk many overlook: risk to purchasing power.
At Wealthy Choices®, I often guide clients through the realities of inflation and its impact on their long-term financial health. Let’s explore what risk to purchasing power means and how you can safeguard your retirement savings against it.
What Is Risk to Purchasing Power?
Risk to purchasing power refers to the gradual erosion of your money’s value over time due to inflation. Even if the number in your bank account remains stable, the goods and services you can purchase with that money may decrease significantly.
For example:
- Imagine you leave $100 in your savings account for 20 years. If inflation averages 5% annually, that $100 will only buy what $37 could today. The result? A loss of 63% of your purchasing power over two decades.
- Even in the short term, inflation can take a toll. If your money earns 1% interest annually while inflation is 2%, you effectively lose 1% of your purchasing power each year.
This steady decline might not feel dramatic initially, but over time, it can have a profound impact on your ability to cover rising expenses, from real estate taxes to household utilities.
How Inflation Impacts Retirement
In retirement, your purchasing power is particularly vulnerable. Fixed-income sources like pensions or Social Security may not always keep pace with inflation, and if your savings aren’t growing to offset rising costs, you’ll need to withdraw more to maintain your standard of living. This can lead to a faster depletion of your savings.
For instance, if your annual expenses grow to $102 due to inflation but your income only increases to $101, you’ll need to pull an additional dollar from your savings to make up the difference. Over time, these incremental withdrawals add up.
How to Mitigate Risk to Purchasing Power
The good news is that you can take steps to combat the effects of inflation and preserve your purchasing power. Here’s how:
- Diversify Your Investments
- Relying solely on a savings account won’t protect you from inflation. Consider allocating part of your portfolio to investments that historically outpace inflation, such as stocks, real estate, or even certain collectibles.
- Invest in Growth Assets
- Assets that have the potential to grow in value over time, such as equities or real estate, can help offset inflation. For example, if you invest in stocks with a long-term growth trajectory, the appreciation in their value can help maintain or even increase your purchasing power.
- Consider Inflation-Protected Securities
- Treasury Inflation-Protected Securities (TIPS) are government-issued bonds specifically designed to protect against inflation. These can be a valuable addition to your portfolio, especially in a rising-inflation environment.
- Stay Informed and Flexible
- Regularly review your financial strategy to ensure it adapts to changing economic conditions. Inflation rates fluctuate, and staying proactive helps you make adjustments as needed.
- Leverage Expert Guidance
- Working with a financial advisor can provide tailored strategies for managing inflation risk while balancing your other financial goals.
Penelope’s Approach to Preserving Purchasing Power
At Wealthy Choices®, I help clients assess their unique financial situations and identify opportunities to protect their purchasing power. Whether it’s diversifying a portfolio, exploring inflation-protected investments, or reevaluating spending habits, my goal is to equip you with the tools to navigate inflation’s impact confidently.
Are You Prepared to Beat Inflation?
If you’re concerned about how inflation could affect your retirement lifestyle, let’s work together to create a strategy that safeguards your purchasing power. Contact me today at 781-577-2311 or visit WealthyChoices.com to start building a financial plan that keeps pace with your goals.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss. Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.
