This year, according to Institute of Investment Companies. These include employer-sponsored retirement plans (both defined benefit and defined contribution plans), individual retirement accounts (IRAs), and annuities.
That’s a lot of money. But do these numbers reflect the amount you have saved? Do you have your ducks in a row when it comes to your retirement savings? You save at least 10% of your salary in a retirement savings vehicle (or ideally more than 10%) and have chosen a asset allocation that meets your future needs?
Setting your retirement savings priorities may be more important than ever due to the confluence of many national and global events that will occur this year. Let’s see why you want to make sure you meet your annual retirement goals.
Reason 1: Inflation is likely to persist.
That is to say, high inflation persists, as anyone who goes to the grocery store or buys gas can attest. The producer price index, which tracks wholesale and manufacturing costs, hit new highs this year to hit record highs, according to the U.S. Bureau of Labor Statistics. The producer price index rose 0.6% in October, resulting in an 8.6% year-over-year increase, the highest since 1990.
Economists say the price hike will likely last into next year, if not beyond.
Certain assets can benefit from a higher inflationary environment, although many experts argue that investing in stocks is one of the best ways to fight inflation. Here are some other options you can consider:
- Treasury Inflation Protected Securities (TIPS): These treasury bonds protect against inflation because the amount of principal increases when inflation rises. TIPS pay interest twice a year, which is calculated on the principal amount so that investors get a higher interest rate during times of rising inflation. TIPs are issued in tranches of 5, 10 and 30 years and you can buy them directly from the federal government or through an online broker.
- Dividend shares: Dividend stocks pay you dividends and this happens when a portion of the company’s profits accrues to you, the shareholder. Dividend stocks can offer inflation protection because you can generate a stream of income along with the natural appreciation in value of a stock.
- Diversification: You’ve always heard that diversification in general is a good idea, but did you know it can help you fight inflation? Having a well-mixed variety of many different assets can provide an inflation hedge when you build it around various types of inflation-resistant assets and asset classes – it could grow at a faster rate than the inflation if carefully stacked.
- Amenities: If you can’t beat them, join them. Commodities often experience a lot of inflation, so adding money to something that is likely to continue to rise can be a great approach. Consider investing in grains, precious metals, power, oil, pork, natural gas and more – the sky is the limit on the number of commodities you can invest in.
- Immovable: Consider adding real estate to your portfolio, either in the form of real estate investment trusts (REITs) or real estate that you buy yourself. REITs refer to companies that often own and operate income-producing real estate. Real estate is a great option in an environment of rising inflation, as rising prices increase the resale value of a property over time and can charge rental income which increases over time as the inflation increases.
Building a retirement portfolio is your best chance of beating inflation, especially when you prioritize growth and carefully consider the type of assets at your disposal.
Reason 2: Interest rates could rise.
The Fed could start raising interest rates by the middle of 2022. We could even see more than one rate hike by the end of the year, according to the FedWatch CME Tool. What does this mean for you?
Here’s the problem: Rising interest rates usually happen during periods of economic strength. This means that a rise in rates could mean that we will reach a bull market. You want to take advantage of any bull market by putting money into your retirement funds. Rising interest rates can mean big things for your portfolio, so make sure you have one in place before the end of the year to take advantage of any rise.
Reason 3: A slowdown in economic growth could occur.
After the disruptions of 2020, Americans turned their sights to growth in 2021. At first, it looked like GDP would grow in the first quarter of 2021, and it grew 6.4% on an annualized basis. In the second quarter, GDP grew even faster by 6.7%. However, the third quarter of the year was hampered by lower consumer spending and supply chain bottlenecks, and rising inflation, supply chain disruptions and the labor shortage did not help.
What does all this have to do with your wallet? In response to slowing economic growth, a strong retirement portfolio will help if you personally face job loss, especially if you are investing in long-term investments independent of your employer.
During a recession, stock values often drop, but this gives you the opportunity to source cheaper stocks, allowing you to invest more cheaply. (Think of it as selling stocks at bargain prices.)
Ready to set up your retirement plan?
It’s not too late to start preparing your retirement plan if you haven’t already. You can also assess the contents of your current portfolio to see if it makes sense heading into the new year.
Also, if stocks fall next year and you already have money in a current portfolio, leave the investments alone – that way you won’t make recession-related losses permanent when you sell.