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How to Invest Money Wisely in Retirement to Fight Inflation | Investing

When the St. Louis Federal Reserve Board announced in October 2022 that the personal consumption expenditures (PCE) price index peaked in June at 7%, it signaled to retirees and near-retirees that the fight against inflation would remain a challenge for the near future.

The PCE index tracks what consumers spend on goods and services, and an inflation rate that high is a pesky problem for retirement investors who need their income stream and investments to punch above weight against inflation.

For perspective, consider inflation’s rub from the vantage point of many baby boomers: Throughout the bulk of their careers over the last 40 years, from 1980 to 2019, the average PCE inflation rate was only 2.55%, according to data from the U.S. Bureau of Labor Statistics.

How much is inflation weighing on the minds of consumers now? According to a 2023 survey conducted by the CFP Board, 89% of Americans are concerned about the cost of living.

How to Manage Sticky Inflation in Retirement

There’s also no shortage of opinions on how to manage sticky inflation these days. While some reports are helpful, others are clearly intended to promote investment products or to sensationalize the data.

For current retirees and near-retirees who want a fighting chance against inflation, some clear-eyed perspectives are warranted. As the author and humorist Mark Twain once quipped, “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”

Perhaps some prescient perspectives from the Federal Reserve and Morningstar can help fill in some of the gaps. The Federal Reserve Bank of Philadelphia’s second-quarter 2023 Survey of Professional Forecasters, which polls 38 macroeconomic specialists and is the longest-standing publication of its kind, projects core PCE will dip below 3% by the fourth quarter of this year. The same survey also estimates that core PCE will reach 2.4% by the second quarter of 2024, and fall to an annual average of 2% by 2025. Morningstar’s published outlook, “Why We Expect Inflation to Fall in 2023,” also estimates PCE growth will dwindle below the Federal Reserve’s target of 2% in 2024, and remain there until at least 2027.

What to Do While Waiting for Cooler Inflation

For now, though, retirement investors are stuck with a dreary dilemma: What are some constructive ways to manage the headwinds of PCE now (currently at 4.4%, according to the U.S. Bureau of Economic Analysis) and also plan for upcoming years in which there may be lower-interest-yielding opportunities in the market, accompanied by softer economic conditions? Here are three strategies to consider for these essential objectives:

  • Lean into the “Popeyes” within your portfolio.
  • Put excess cash to work.
  • Expand sources of income and growth potential.

Lean Into the ‘Popeyes’ in Your Portfolio

Much like the fictional, spinach-eating character who is a strong ally to his friends, equities have a long track record of providing consistent aid to retirement investors.

Innovation in equities is the spinach that provides the necessary punching power retirement investors need over time: According to recent research from Hartford Funds, from March 1973 to December 2020, U.S equity returns, in particular, have outperformed inflation 90% of the time when inflation was below 3% and rising, and 76% of the time when inflation was above 3% and on a downward trend.

Put Excess Cash to Work

The Investment Company Institute, which tracks money-market funds, estimated that investors held $5.45 trillion in cash on the sidelines as of mid-June. For daily expenses beyond the next 12 to 24 months and big-ticket items (like a down payment on a home) within the next five years, this may be a good time to rethink how excess cash reserves can work harder within your portfolio.

For example, according to data from BlackRock, more than 70% of fixed-income sectors now yield over 4%, the highest level in 15 years.

Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, suggests a broadly diversified strategy: “An appropriate asset allocation will set up retirees for success by allocating ongoing and medium-term liquidity needs into relatively safe, high-quality fixed income while letting the balance of their savings grow in long-term higher-risk stock market exposures.”

Expand Sources of Income and Growth Potential

For retirement investors who need an average annual portfolio return of, say, 5% to sustain their cash flows throughout retirement, consider PGIM Quantitative Solutions’ 2023 capital-market assumptions (geometric returns) for a variety of asset classes over the next decade:

Asset class Projected return over the next 10 years
U.S. core bonds 3.9%
Global bonds 4.0%
U.S. equities 7.0%
Developed international equities 8.8%
U.S. REITs 6.4%
60/40 portfolio 6.6%

The desire for competitive fixed-income yields and a smoother ride in the market is an old narrative, and seemingly a never-ending challenge since the 2008-2009 financial crisis. And the emergence of four-decade-high inflation in 2022 complicated things for retirement investors.

What has not changed, though, is the compelling advantage of a diversified portfolio among a variety of asset classes. Diversification provides retirement investors with multiple opportunities for success, often with lower levels of risk and, yes, a fighting chance against inflation, too.

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