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TIPS and ETFs Can Help Protect Retirees Against Inflation

Investments and portfolio strategies retirement savers can use to manage the risk of inflation.

Inflation is back and it’s staring straight at all Americans, and especially retirees who might be living on a fixed income.

Consider: The consumer price index (CPI) for Americans 62 years of age and older has risen 3.7% for the 12 months ending April 2021, and the CPI for all Americans has increased 4.2% over the same period.

But according to the Senior Citizens League, Social Security beneficiaries are really behind the eight-ball. Since 2000, cost of living adjustments (COLAs) have increased Social Security benefits a total of 55%, yet typical senior expenses through March 2021 grew 101.7%.

The Senior Citizens League also noted that the average Social Security benefit rose from $816 a month in 2000 to $1,262.40 by 2021 due to COLA increases. However, because retiree costs are rising at a far more rapid pace than the COLA, a Senior Citizens League study found that a Social Security benefit of $1,645.60 a month in 2020 would be required just to maintain the same level of buying power as $816 had in 2000.

So, what can older Americans do to make sure they manage the risk of inflation and loss of purchasing power?

Consider Using a Barbell 

According to Mike Ashton, a managing principal with Enduring Investments, retirees often get two versions of advice about investing for their golden years.

“Seniors are concerned about losing purchasing power slowly, through inflation, and so conventional advice usually advocates maintaining a fair amount of risky assets to “keep up” with those costs, while withdrawing a steady amount, the 4% rule for example,” he said.

But of course, those risky assets can move abruptly, which triggers the opposite concern, said Ashton. “Seniors are also concerned about losing purchasing power quickly, through market corrections/bear markets,” he said. “And the conventional advice is to keep a ‘rainy day fund’ or some such idea. So, in brief, the argument is that they should be riskier than they would like to keep up with inflation, and less risky than they need to be to protect against market declines. It’s not surprising that it's confusing.”

Ashton advocates that seniors should invest in a risk “barbell” with the “safe” side invested in inflation-linked assets such as TIPS rather than cash. The “risky” side should ideally be invested in “downside-protected” sorts of risky assets such as some of the new ETFs from Simplify and others that have built in downside protection on equities, plus some amount of commodities as an alternative to stocks.

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“At the end of the day, the important element to portfolio construction is to directly address and balance the fear of losing money to inflation, and losing money to market movements of risky assets,” said Ashton. “That’s a simple idea, not easy to implement in practice but it’s what it all boils down to, in my opinion.”

Upside Potential With Downside Protection

Social Security recipients have faced tough investing choices for some time now, said David Macchia, the founder and CEO of Wealth2k. “An unprecedented 11-year bull market is a reality that probably frustrates those seniors who have been uncomfortable with exposing their savings to investment risk,” he said. “With safe money yields so low, it’s a real conundrum.”

Given that, Macchia is in favor of the new generation of registered indexed-linked annuities (RILAs) because they allow a senior to precisely know their loss potential while at the same time providing for greater upside gain should the underlying index increase in value.

“The value proposition - upside potential with downside protection -- is hugely powerful and should be leveraged by more retirees,” he said.

Not Yet Retired? 

For those not yet retired, John Mulligan of Mulligan Capital first recommends waiting to claim Social Security until age 70. For every year you delay claiming Social Security past your full retirement age up to age 70, you get an 8% increase in your benefit. “No COLA in the marketplace exists superior to the COLA from delaying Social Security until age 70,” he said.

In addition, he recommends working longer, trimming expenses, saving more, controlling debt, downsizing, exploring a life annuity, and shopping for Medicare plans.

“Nobel Laureate Bill Sharpe has opined that retirement income planning is unsolvable,” said Mulligan. “You have to work all the pieces of the puzzle and then you should hire a retirement income specialist/adviser.”

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