How to protect your retirement assets from inflation: Morningstar

Inflation is a buzzkill for personal finances, lowering the value of your savings and raising your spending levels.

That's especially an issue for retirees, who often have limited resources and may need them to last a long time.

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While inflation peaked in June 2022 at 9.1%, it still stood at 3.2% in July. That's well above the Federal Reserve's target of 2%.

Christine Benz, director of retirement planning for Morningstar, has offered commentary on how to protect your retirement assets.

At the portfolio level, Benz suggests Treasury Inflation-Protected Securities. She favors shorter-term TIPS, which often are less risky than long-term paper.

"I Bonds, the breakout sexy category of 2022, is another category to consider bringing into your retirement portfolio," Benz said.

"The idea is that you have explicit inflation protection for the safe portion of your portfolio with these types of products."

Allocation for Inflation Protection

So how much inflation protection do you need?

That depends on individual preferences, of course. But "my colleagues in Morningstar Investment Management typically recommend TIPS and I Bond allocations of 25% to 30% of your fixed-income portfolio," Benz said. So that's a good starting point.

And what about equities? "Stocks are by no means a direct inflation hedge," Benz said. "We certainly saw that on stark display last year when stocks went down even as inflation went up."

But on the plus side for equities, "over very long periods of time, we know that stocks more than any other major asset category have a shot at beating inflation," she said.

That points to the importance of a balanced portfolio -- "having safe securities, but also having growth-oriented securities to help beat back inflation," Benz said.

Turning to your financial plan, Benz cites two strategies to consider.

One is pushing back the start of your Social Security payments. "The key reason is that you receive an enhanced return for delaying," she said.

Max Out on Social Security at Age 70

You can start taking Social Security at age 62. But the amount you receive goes up each year you wait, maxing out at age 70.

Delaying the start is "especially valuable if you think you'll have a longer-than-average life expectancy," Benz pointed out.

In addition to receiving bigger payments, you also get the inflation adjustments mandated for Social Security that you would have received if you had started taking payments earlier, she notes. "So, your enhanced return is also inflation-adjusted along the way."

As for the other financial-plan strategy, it's helpful to think about inflation as you calculate how much of your investment portfolio to draw down, Benz explained.

"If you believe inflation will be high, especially in the early years of your retirement, it makes sense to be a little more conservative in starting withdrawals," she said.

That's because the money you withdraw early on will have more time to suffer the ravages of inflation.

"On the other hand, if you believe that inflation will be very low, you could take a little bit more from that portfolio for starting your withdrawal," she said.

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