Inflation can erode the purchasing power of your wealth over time, especially for individuals approaching retirement. Recent reports suggest a '40% chance' that the Federal Reserve will pivot back to hiking interest rates in 2025, underscoring the critical importance of protecting your assets against inflation.
Disclaimer: The information provided in this blog is for informational purposes only and does not constitute financial, tax, or legal advice.
With rising living costs and economic uncertainty, safeguarding your wealth is crucial for helping you maintain your desired lifestyle in retirement. Here’s what you need to know.
Inflation refers to the increase in the cost of goods and services over time, which decreases the purchasing power of money. When inflation rises, the value of fixed-income assets, such as cash or bonds, tends to diminish. For example, if you are holding significant amounts of cash, its value erodes as prices increase. Similarly, bonds with fixed interest rates can lose value in real terms when inflation rises because the return on these bonds does not keep up with the increased cost of living.
While inflation has been relatively moderate in recent years, hovering around 3-4% in the U.S. in 2024, times (and rates) are yet again changing, and its long-term impact on savings and investments is significant, particularly for those nearing retirement.
For individuals with significant wealth, inflation affects daily expenses, fixed income, investments, and their nest egg. Without proper strategies, inflation can erode the purchasing power of your retirement savings, making it harder to sustain your lifestyle over time.
As we head into 2025, the Federal Reserve's latest inflation projections provide valuable insight into the economic landscape and its potential impact on investors. Recent updates indicate that inflation is expected to remain above the Fed’s 2% target, with headline inflation projected to reach approximately 2.5% by the end of 2025. Core inflation, a critical measure excluding volatile food and energy prices, is also forecasted to hold steady at similar levels. This signals a slower return to pre-pandemic inflation norms, reflecting persistent pressures in the economy.
As of last week, continued economic strength along with inflationary policies expected from President-elect Donald Trump could mean the Federal Reserve may have to resort to rate hikes in 2025, according to Apollo Global Management chief economist, Torsten Sløk. "The strong economy, combined with the potential for lower taxes, higher tariffs, and restrictions on immigration, has increased the risk that the Fed will have to hike rates in 2025," he wrote in a note on Thursday. "We see a 40% probability that the Fed will raise interest rates in 2025."
For investors, this outlook highlights the importance of staying informed about potential rate hikes in 2025 and how they could impact financial strategies. Rising interest rates can influence the value of various investments and borrowing costs, so understanding these dynamics is essential. Some individuals may choose to explore options like shorter-duration bonds, inflation-resilient assets such as real estate or commodities, or securities that adjust with rate changes.
Additionally, equities in certain sectors may offer opportunities for growth during inflationary periods. It’s always a good idea to consult with a qualified financial professional to determine strategies that align with your unique financial goals and circumstances.
Understanding the risks inflation presents to your wealth is the first step. Let’s take a look at some strategies many high-net-worth investors use to help protect their wealth and help ensure that their retirement savings are resilient in an inflationary environment.
Diversification can be one of the most effective ways to help protect wealth against inflation. Spreading investments across various asset classes can help reduce the risks associated with inflation. A well-balanced portfolio can help offset the negative effects of inflation on any one asset class.
Equities, or stocks, have historically outpaced inflation over the long term. While the stock market can be volatile, high-quality companies tend to grow at rates that outpace inflation over time. Many investors diversify across sectors and regions to help manage risk and increase potential returns.
Additionally, a mix of international investments may offer opportunities to help hedge against inflation in specific markets. Inflation rates differ across countries, and international assets can help provide exposure to economies with lower inflation.
Real assets, such as real estate, commodities, and precious metals, have traditionally been viewed as reliable hedges against inflation. Real estate, in particular, tends to appreciate in value over time and often generates rental income that can rise in line with inflation, making it an attractive option for long-term wealth preservation.
Precious metals, like gold, are another example of real assets that have historically maintained their value during times of inflation. While they don’t generate income like real estate, they can act as a store of value and help hedge against economic uncertainty.
While real assets can be effective inflation hedges, it’s essential to manage them carefully. For instance, real estate investments require active management and may come with costs related to maintenance, taxes, and market fluctuations.
For those concerned about inflation’s impact on fixed income, there are securities specifically designed to help protect against inflation, such as Treasury Inflation-Protected Securities (TIPS). These bonds adjust their principal value with inflation, helping preserve the purchasing power of investments.
TIPS can be a helpful addition to a diversified portfolio. They have the potential to provide a reliable, government-backed option for those seeking stability in an inflationary environment. However, it’s important to note that these securities may not offer the same level of return as riskier investments, like stocks, and should be balanced within a portfolio based on specific goals and needs.
While tax-advantaged accounts such as IRAs, 401(k)s, and Roth IRAs may not directly protect against inflation, they can help accumulate more wealth over time. Maximizing contributions to these accounts may help reduce the tax burden, allowing investments to grow more effectively and potentially outpacing inflation.
These accounts may help provide advantages for retirement savings. Utilizing them can help ensure wealth grows more efficiently. However, always be mindful of these accounts' contribution limits and withdrawal rules.
Some stocks are better suited to weather inflationary periods. For example:
While these stocks may be more resilient during periods of inflation, it’s important to evaluate each investment carefully and consider how it fits within broader financial goals.
Rising inflation can make traditional fixed-income investments, such as long-term bonds, less attractive, as their yields often do not keep pace with inflation. To help mitigate this risk, many consider allocating a portion of their fixed-income investments to options that adjust with inflation, such as floating-rate bonds.
Alternatively, some investors also consider shorter-duration bonds. These bonds are generally less sensitive to interest rate increases than long-term bonds and can help provide stability when inflation rises.
For those with significant wealth, alternative investments such as private equity, hedge funds, and venture capital may offer the potential for higher returns that can outpace inflation. These investments tend to have higher risks but also help provide access to opportunities that may not correlate with traditional stock and bond markets.
However, alternative investments often require more expertise and due diligence. They may also be illiquid and take time to provide returns. Therefore, balancing these investments within the context of your broader retirement strategy and risk tolerance can be helpful.
The Fed’s inflation projections for 2025 reinforce the need for a thoughtful, proactive approach to investment planning.
Protecting wealth from inflation is essential to retirement planning, particularly for those approaching retirement with substantial assets. Diversification, investing in real assets, using inflation-protected securities, maximizing tax-advantaged accounts, and selecting inflation-resistant stocks are all strategies that can help preserve wealth in an inflationary environment.
However, it’s important to remember that no single strategy is a one-size-fits-all solution. Each individual’s financial situation is unique, and a tailored approach is necessary to effectively navigate inflation’s impact. Partnering with a knowledgeable financial advisor can help ensure your portfolio is positioned to withstand inflation and support your long-term financial goals.
For more insights and financial resources, contact NJM Wealth Preservation Strategies.
Inflation can reduce the real value of assets left to heirs. It’s important to periodically review and adjust your estate plan to account for inflation and help meet your legacy goals. Strategies like indexing gifts to inflation or investing in growth-oriented assets may also help mitigate its effects.
Certain industries, such as healthcare, energy, and technology, tend to perform well during periods of inflation. These sectors often have pricing power or produce goods and services that remain in demand regardless of economic conditions.
Charitable giving strategies, such as donating highly appreciated assets or using donor-advised funds, may offer tax benefits while helping preserve the value of your wealth. These strategies may also help reduce your taxable income, freeing up resources to address inflationary pressures.
Insurance products, like whole life or indexed universal life policies, can help provide cash value growth that keeps pace with or exceeds inflation. Additionally, long-term care insurance can help protect your retirement savings from the rising costs of healthcare services, which often outpace general inflation rates.
It’s advisable to review your financial plan annually or whenever there are significant changes in the economy, such as a spike in inflation rates. Regular reviews help ensure your investments, expenses, and savings goals remain aligned with current economic conditions and your long-term financial objectives.
Disclaimer: The information provided in this blog is for informational purposes only and does not constitute financial, tax, or legal advice.