Baby Boomers and Retirement: 3 Ways to Address Inflation in Your Portfolio

In November 2021, consumer prices jumped 6.8% over the year before – increasing by levels not seen in decades. Federal Reserve policymakers had maintained this spike was temporary as the economy reopens, but they've recently announced steps attempting to address inflation. Plenty of investors are worried that higher inflation – and eventually higher interest rates to tame it – may become the new norm.

Remember that inflation is always lurking and should be a consideration for long-term investors. Even when benign, inflation can erode our purchasing power. For example, if you spend $50,000 a year on living expenses now and annual inflation is 2%, you would need $74,297 in 20 years to afford the same lifestyle. At 3% annual inflation, you would need $90,306.

Here are three ways to address inflation with some minor tweaks to your portfolio:

1. Add exposure to TIPS or inflation-focused funds. Treasury Inflation Protection Securities (TIPS) are government-backed bonds designed specifically to maintain purchasing power during rising inflation.

   TIPS pay out interest twice a year at a fixed rate. But the key is that your principal investment is regularly adjusted up – or down in rare periods of deflation – based on the Consumer Price Index. So, as your principal grows with rising inflation, so will the amount you earn in interest.

   When TIPS mature, you receive your principal – either the amount that's been adjusted upward or your original investment – whichever is greater.

   You can buy TIPS directly from the government. But for many investors, the easier way to maintain their purchasing power is to invest in an inflation-focused fund. The funds, often with the goal of generating income and providing inflation protection, usually invest in TIPS and other inflation-linked investments.

2. Add exposure to real estate. Inflation tends to increase property values as well as the amount of rent landlords can charge. You don't have to directly own properties, though, to use real estate as an inflation hedge. Instead, you can invest in real estate securities funds, which typically invest in Real Estate Investment Trusts (REITs) that own and often manage offices, apartment buildings, shopping centers, hotels, and more. REITs make money by collecting rents from tenants, and pass on most of their taxable income to shareholders in the form of dividends.

3. Maintain a diversified portfolio.¹ Some sectors, such as consumer staples and commodities, traditionally perform well in inflationary times because they can raise their prices to keep up. But there's always the risk that the sector you invest in might not perform as expected. For example, lumber was a hot commodity in the spring of 2021 because of increased demand and worker shortages, but its price plunged over the summer.

   Instead, having exposure to a wide variety of stocks and bonds serves investors in all sorts of markets and economies, including periods of higher inflation.

   By investing in equity funds that hold many stocks, your money can be spread across various sectors, big and small businesses, and U.S. and international companies. This way, you're more likely to have at least some money in stocks that are on the upswing, even if others lose ground.

   Similarly, investments in bond funds that hold various investments may be better able to weather inflation. For example, funds that include exposure to floating-rate loans whose interest rates can rise when short-term rates go up. Or, if you're worried about the impact of rising rates in the short term, you may consider investing in a short-term bond, stable value, or cash-management fund.

   In addition, many retirement plan lineups include target-date funds,² which offer diversification and a strategy that seeks to reduce your investment risk over time, all in one fund. Log in to your account for a list of the funds available to you.

¹ Diversification does not protect an investor from market risks and does not assure a profit. An investor must consider the risk associated with all mutual funds used to diversify assets.

² A target-date fund is not a complete solution for all of your retirement savings needs. An investment in the fund includes the risk of loss, including near, at, or after the target date of the fund. There is no guarantee that the fund will provide adequate income at and through an investor's retirement. Selecting the fund does not guarantee that you will have adequate savings for retirement.