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Even Small Increases In Inflation Can Have Large Impacts on Retirement Portfolios
  • May 30, 2022

Preparing portfolios for inflation could mean making some tough decisions

Given that asset allocation alone isn’t a sufficiently reliable hedge, investors are left with few choices for preparing.

1. Add money to the portfolio today

The simplest solution—although likely the hardest to actually make happen—is to inject funds into the retirement portfolio. The amount would be the difference between the RPT before and after the change in expected inflation.
Additional capital needed = RPT After – RPT Before.

If Donna’s RPT was $242,257 before the expected change in inflation and is $288,491 now, the solution is to add $46,234 to her portfolio today.

2. Decrease income needs

The second solution doesn’t require additional capital up front; instead, it requires that investors accept that they’ll receive a smaller income in retirement; in other words, if investors can’t put more money in their portfolio today, they can decrease the amount they receive in retirement. The decreased income can be calculated as:

Revised real income in retirement =

Prior real income in retirement / (1 + ΔRPT%)

In Donna’s case, she would have to change her expectations for real income in retirement from $50,000 a year to $50,000/(1 + 0.191), or $41,981 annually.

3. Postpone retirement

The third option is to delay retirement. But for how long? This depends on the change in expected inflation and the age of the investor. If Donna (age 30) were seeking to keep her $50,000 of yearly real income at retirement without adding funds to her retirement portfolio today, she would need to retire 44 months (a little over three and a half years) later than originally planned.

Pushing back your retirement age is quantifiable (if not ideal)

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