Protect Your Retirement Savings in Troubled Times
Reminders are everywhere from the grocery aisle to gas pumps: This is a challenging phase of market history. The growing impacts of inflation should remind affluent Sonoma County retirement investors it is time to diversify and hedge their investments.
Doing so ensures that there is no single concentration of holdings in your portfolio, ensuring the protection of your retirement savings. During economic uncertainty, it is wise to make these efforts part of a comprehensive wealth management plan.
This helps to preserve your wealth as well as keeps you from any tax-related consequences that may impact your capital.
Next-Generation Wealth Planning: Inflation
Commonly defined as the rate of change in prices, inflation influences the value of your wealth, now and over time. Rising inflation results in paying more for the same goods and services. If your income cannot keep up, you lose purchasing power.
Sonoma County Retirees and those approaching retirement should be informed that inflation also increases your cost of living over time. Therefore, your retirement savings today will be of lesser value in the future. However, you can benefit if you own certain assets before prices increase in a hot market, such as in real estate.
The experienced Sonoma County wealth advisors on the Montgomery Taylor team can recommend diverse investments based on your goals, asset mix, and risk tolerance. Through diligent in-house investment research and a disciplined process, we can actively monitor your portfolio holdings.
What Is Driving Inflation Now?
The current national and global state of affairs is the result of simultaneous events. In other words, inflation recently hit a 40-year high because of:
- COVID-19 pandemic impacts (lockdowns, illness, job loss, and overall fear)
- Supply chain disruption (breakdowns in the manufactured flow of goods delivered to consumers)
- Government/Stimulus spending (increasing U.S. debt limits)
- Scarcity of workers (people not wanting to go back to work or forced to retire early)
- Rapid re-opening of the economy (pent-up demand meeting insufficient supply)
- The Russian-Ukraine war (turmoil overseas causing a global ripple effect)
Synchronized recovery efforts do not seem to be reducing the economic tension. As a result, some investors are making fear-based decisions. They are forced into early retirement and tapping into their savings accounts.
To avoid hasty, fear-driven responses, an experienced registered investment advisor can help preserve your principal through the art of security analysis. Montgomery Taylor’s next-generation wealth planning can help you build a strategy to protect what you’ve worked so hard to accumulate.
Which Investments Can Help You Hedge Against Inflation?
- Treasury Inflation-Protected Securities (TIPS). Measured by the Consumer Price Index, these assets’ yields are based on their current principal amount. When inflation rises, TIPS principal adjusts higher, along with the payments. When they mature, you earn whichever is greater, the original principal or adjusted principal. TIPS are issued every five, ten, and 30 years.
- Exchange-traded Funds (ETFs). An exchange-traded fund is an investment security that tracks an index, sector, commodity, or asset. Like stock, ETFs can be purchased and sold on a stock exchange. Passive and active ETFs include bonds, stocks, industry, commodity, currency, inverse, and leveraged.
- Precious Metals. The price of gold is determined by its demand, its amount in the Federal Reserves, and the value of the U.S. dollar. Gold becomes a more attractive commodity (and industry ETF) when the dollar loses value. You can gain exposure to other precious metals like silver, platinum, and palladium as a hedge. Ask your wealth manager if investing in these is right for you.
- Real Estate. Owning this kind of asset can offer substantial profit, whether you buy and hold, flip, rent, or lease property. Since property prices and rental income commonly rise with inflation, real estate investment trusts (REITs) could be a good fit. These companies own and operate income-producing real estate, paying out dividends to investors. Tax efficiency is crucial with this investment strategy: Paying property taxes can total as much as 25% of operating expenses. If property taxes increase, your cash flow can be significantly reduced. Even though REITs offer high yields, dividend taxes will be due.
- Commodities. These assets include raw materials like oil, coffee, orange juice, beef, grain, precious metals, as well as electricity, natural gas, emissions, and foreign currencies. Their prices are a good indicator of approaching inflation. Whenever they rise, so does the price of the products used to produce them.
Which Investments Should You Avoid During Inflationary Periods?
Low-Risk Bonds. Fixed-rate; low-risk bonds correlate with interest rates, meaning that they commonly increase with inflation. They have longer maturity debts, meaning that they take a greater amount of time to mature. As a result, they have not considered a wise hedge investment because inflation reduces their face value.
Growth Stocks. The prices of growth stocks are typically high. This is because investors expect higher sales; a profit in the future. However, inflation can reduce these companies’ long-term earnings estimates as well as their free cash flow. Add in supply chain issues and you have a recipe for diminishing returns.
Your Bottom Line
Working with a fiduciary financial advisory firm will ensure that your assets are working for you; not against you. The idea is to ensure that you have a wealth management plan comprehensive enough to cover elements of risk, including inflation, recession, and market growth.
These are critical components of your long-term financial stability. If you’re already retired or nearing retirement, it is imperative to have measures in place to maintain your principal and avoid dipping into your savings for day-to-day living expenses.
Especially in times of market volatility, it is essential to work with financial professionals that will be fully transparent with you at all times. At Montgomery Taylor, you are supported by an investment research team and financial advisors collaborating to ensure that you receive the best possible advice. We are FINRA/SIPC compliant, as well.
Call us today to have a clear investment advisory conversation about your financial goals.
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At Montgomery Taylor Wealth Management, we understand the challenges of retirement planning and can help put together a plan to protect your family’s legacy. Contact us to find out how we can help you!