With today’s high inflation and rising interest rates, some retirement plans may be at risk due to assets depleting prematurely due to these factors. Today’s economic conditions are much worse than coming out of the Great Depression when the U.S. experienced inflation, high-interest rates, historical debt, and tax levels when tax rates were above 40% for over 40 years (1940-1981). Here’s an explanation of two significant risks to your retirement plan: inflation risk and interest rate risk.
Inflation risk is the risk that the future real value (after inflation) of an investment, asset, or income stream will be reduced. Inflation risk impacts your savings and investments in these ways:
- Since prices increase over time and more significantly during high inflation, you cannot buy as much as before.
- Your net worth may decrease because inflation reduces your purchasing power.
- Inflation hurts the performance of investments with a set annual return, such as a bond or certificate of deposit (CD), since you receive the same return each year.
What investments can help offset inflation risk in portfolios?
- Inflation-protected annuities (IPA) are indexed for inflation risk through an inflation rider which is capped for inflation. They earn more when inflation goes up and less when inflation goes down. However, this feature comes with a price. Your financial professional can help determine if an indexed inflation rider is appropriate for your situation.
- Alternative investments such as gold and precious metals have historically performed well during high inflation, but past performance does not guarantee future performance.
Interest rate risk is the potential for investment losses that results from a change in interest rates. When interest rates rise, the price of a bond and other fixed-income securities decreases. The opportunity cost of holding these investments increases due to the cost of missing out on positive return investments. Interest rate risks to your retirement plan impact your portfolio in the following ways:
- Fluctuations are not correlated to stock prices, but they may impact stock market fluctuations.
- Interest rates impact fixed-rate investments and may decrease overall performance if the portfolio is weighted too heavily in fixed assets.
How can investors offset interest rate risk in their portfolios?
- Evaluate your portfolio’s composition to determine how assets classes may be impacted and adjust to mitigate against decreasing performance.
- Meet with your financial professional to determine a strategy appropriate for your situation.
- Consider a fixed-indexed annuity that offers both a fixed rate of return and a return basing on an index, such as the S&P 500.
Are you concerned about these Risks to Your Retirement Plan?
Your financial professional can help you determine an appropriate strategy for your situation to help mitigate inflation risk and interest-rate risk in your portfolio. Contact them today.
SWG2153188-0422a The sources used to prepare this material are believed to be true, accurate and reliable, but are not guaranteed. This information is provided as general information and is not intended to be speciﬁc ﬁnancial or tax guidance. When you access a link you are leaving our website and assume total responsibility for your use of the website you are linking to. We make no representation as to the completeness or accuracy of information provided at this website. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information and programs made available through this website. An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information. Fixed Index Annuities are designed to meet long-term needs for retirement income, and they provide guarantees against the loss of principal and credited interest, and offer the reassurance of a death benefit for your beneficiaries.
Our family financial services firm, August H. Velten & Associates, has been in business for 12-years in Melbourne, FL. August Velten (CLU) is a 40-year veteran of the Financial Services industry. August is a former instructor for the Life Underwriter Training Council and once occupied the legislative seat for the Maine Association of Life Insurers. In Brevard County, you may have seen him on local access TV or read one of his articles in a local area magazine. Jessica Waterhouse, August’s daughter, left her own practice to join the firm in 2019. Jessica is a Florida licensed insurance producer, securities licensed (Series 65), a long term care specialist (CLTC) and holds certification as a National Social Security Advisor. Both August & Jessica are instructors for financial literacy workshops in both Brevard and Indian River County offering education in Social Security and Financial Planning. Contact the office today to schedule an introductory meeting or review of your current financial plan.
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