Inflation is hitting personal savings hard. It’s more important than ever to think about your financial plan.
Americans in all walks of life are struggling with high inflation. Inflation is normal, but excessive inflation hurts everyone, even if it’s in different ways.
Rising living costs are preventing young Americans from financially establishing themselves. Those nearing retirement must weigh how inflation could affect their lifestyle. In some cases, people wonder whether they can retire at all. According to research by The Motley Fool, inflation is the top concern among Americans heading into the 2024 election.
It’s as important as ever that people continue building toward their financial future. Despite the concerns, everyone can take steps to protect their retirement savings in any market.
Here are three tips you need to know.
1. Build a financial safety net
The most crucial part of protecting your retirement savings is not touching them. Unfortunately, people frequently borrow against their retirement plans due to financial hardship. It can be the right decision if it’s genuinely for an emergency. But whether it’s justified or not, tapping into retirement savings disrupts compounding, which ultimately means you’ll have less money down the road.
Establishing a fund to cover potential emergencies is the best way to prevent dire situations that force people into early retirement withdrawals. Many financial experts recommend keeping three to six months of living expenses somewhere easily accessible, like a high-yield savings account. Remember that the point of an emergency fund is to be there when you need it, so don’t tie up that money in something volatile or hard to sell.
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2. Invest your money
Once you have an emergency fund, you should limit your cash holdings. Cash can feel safe, but most people keep it in standard savings accounts that offer almost no return on their money. That means inflation is slowly eating up their money’s purchasing power.
Even those using high-yield savings accounts might keep pace with inflation, but it’s usually nothing more. You almost certainly won’t build long-term wealth holding your savings in cash.
Instead, invest in assets with economic value, such as stocks, bonds, real estate, and precious metals. Asset prices generally increase with inflation; they can build wealth if they grow faster than inflation rises.
Thanks to exchange-traded funds (ETFs), people can invest in various assets without owning them. Don’t want to own gold physically? There’s an ETF for that. Not keen on buying a property? There are tons of real estate ETFs to choose from, too. You can easily build a diversified portfolio in today’s world.
3. Find the right strategy for you
When you’re saving for retirement, slow and steady wins the race. There is nothing wrong with a retirement nest egg growing at a single-digit annual rate. The S&P 500 has returned about 10% on average throughout its history, but look at the volatility that comes with it:
^SPX data by YCharts.
Generally, the higher the returns, the riskier and more volatile the asset. Young people might lean into stocks and cryptocurrencies because they have time to ride the ups and downs if it means higher long-term returns.
Nearing retirement? Something like a stock market crash would be a disaster. On the other hand, a portfolio of bonds might be great for an older investor but not someone younger who is leaving money on the table playing it too safe.
It’s imperative to manage your risk with an investment strategy suitable for where you are in life. Don’t hesitate to consult a professional advisor if you’re unsure whether your investment plan fits your age, risk tolerance, and financial circumstances. The importance of having the right plan for you cannot be overstated.
