Thrifty Thinking: 3 Tips For Guarding Your Money Against Inflation

Inflation may be creeping up on Americans, which could mean your investments and retirement savings won’t be worth as much as you hoped.

“The average person doesn’t spend a lot of time thinking about inflation, but it isn’t something you can ignore if you hope to build a nest egg that can see you through hard times – and retirement,” says John Hagensen, founder and managing director of Keystone Wealth Partners (www.Keystonewealthpartners.com) and author ofUnleash Your Investments.

How significant is inflation?

Hagensen suggests thinking back to that time as a kid when you asked your grandfather to buy you a Snickers bar and he nostalgically replied that a candy bar only cost him a nickel back in his day. Today candy bars average about $1.50.

“That’s just one example of how what once would have seemed like a lot of money doesn’t buy anywhere as much as it did in the past,” he says.

Inflation isn’t accelerating dramatically – at least not yet – but it is on the upswing. In March, the consumer price index jumped to 2.4 percent, up from 2.2 percent a month earlier. Core inflation, which excludes food and energy prices, increased to 2.1 percent from 1.8 percent.

What does all this mean for your money right now? Hagensen offers three tips for anyone who wants to try to avoid the insidious creep of inflation:

• Avoid long-term bonds. The Fed has planned gradual interest-rate hikes this year, and rising interest rates mean falling bond prices. But not all fixed-income investments are created equal, Hagensen says. “The longer until a bond matures, the more drastic the decline will be as rates increase,” he says. For many, the plan to mitigate this “interest-rate risk” consists of simply avoiding the urge to sell bonds on the secondary market at a loss. But Hagensen says that’s often nothing more than “jumping out of the frying pan and into fire." Historically, your money has to double every 20 to 25 years to simply keep up with inflation, he says. Therefore, you will likely find yourself disappointed by the purchasing power of your original bond investment when the principal is finally returned at maturity.
• Avoid long-term CDs. This should be intuitive. “If inflation is occurring and interest rates are rising, then there’s little logic in ‘locking up’ your savings at lower rates than what you suspect will soon be available,” Hagensen says. If you are adamant about owning CDs in a rising-interest-rate environment, a laddering approach may be prudent. Even so, he advises staying short-term with maturity dates. 
• Broadly diversify. If you have a long-time horizon, it’s likely your asset allocation consists of equities. “Inflation can have a relatively benign impact on your portfolio, assuming you maintain financial discipline during times of market fluctuations while possessing adequate cash reserves to cover short-term needs,” Hagensen says. If you’re nearing or entering retirement and want a more predictable short-term approach, he says, it may still be prudent to diversify a portion of your portfolio into equities as a complement to your more stable asset categories.

“Regardless of what your personal situation is,” Hagensen says, “you can’t ignore the fact that inflation has the potential to upset your carefully arranged financial plans.”

About John Hagensen

John Hagensen is the founder and managing director of Keystone Wealth Partners (www.Keystonewealthpartners.com). He also is author of Unleash Your Investmentsand hosts a weekly radio show, Myth Busting with Keystone Wealth Partners. His vision in starting his firm was to deliver financial planning strategies free from Wall Street’s embedded conflicts of interest. Hagensen holds the credentials of Certified Funds Specialist, Certified Annuity Specialist, Certified Estate & Trust Specialist, Certified Tax Specialist and Certified Income Specialist. He also holds a designation from the National Social Security Association.