Inflation is that invisible tax demon that is slowly sucking the value out of your investments. In retirement, it gets even worse because you are on a fixed income. If you don't do a lot to prepare, you will be in a lot of trouble when it comes to you.
The time to beat inflation in retirement is way before you even think about retiring. You have to use that time to build a great portfolio that is completely resistant to yearly inflation.
You should also position yourself in a way that can be diversified in how you approach retirement. It is one of the major problems that people face when they get to this stage of life.
Making Sure You Get to Retirement in One Piece
In reality, beating inflation in retirement will have to start way before retirement comes. For most people, it starts the minute they work their first job.
You cannot do well in retirement unless you get there. It might seem like an obvious statement, but many people forget that.
The truth is that the types of investments you choose when you are planning for retirement are what will help you when you finally get there. There are so many opportunities, but it is almost always a balanced strategy that wins in the end.
The biggest thing you can do is to build a portfolio that is varied enough to help you in any situation. For example, you might choose to go with a simple index fund with an average growth rate of about 7%.
However, that average growth rate is not uniform. You would still need a lot of money to ensure you have cash flow when the index fund isn't performing as it should.
That is why you will also need to have riskier investments that have bigger returns. You will also need to have the inverse as well. That gives you enough coverage to succeed in the majority of retirement scenarios.
Another thing to think about is whether or not you will be seeking early retirement. There is a thriving community of people dedicated to doing things to retire early. The FIRE community emphasizes simple investments that give them reasonable returns above the inflation rate.
If you are looking to retire early, you can beat inflation by sticking with proven index funds and being flexible with how you take out money.
For example, there will be periods of time when you can't withdraw money from your index fund. Because of that, you will also need other investments to help you get the best returns possible.
Another route you can take is to focus on having stocks that pay a dividend out. That dividend can then be reinvested back into the stock market to keep growing. It provides a much less risky strategy than only looking at certain stocks.
If you are confident, you might also want to go for a stock that you think will shoot up thousands of percentage points relatively quickly. However, that happens rarely, but it would be a massive advantage in helping you beat inflation in retirement.
Despite everything mentioned already, many of you probably don't even understand inflation. What is it? You can think of inflation as an average rise in cost for everything in the economy. Where does it come from?
A few things cause inflation, but no one can pinpoint the exact thing that causes it at any given time. The major one is an expansion of the money supply. Simply put, the government prints more money, resulting in the money being valued less.
When the government prints more money, you can think of it as a tax on the money you already have saved. That is what inflation does. It is typically a tax on the savings you already have. That is because your money now has less purchasing power.
Many people also think that demand and production costs have something to do with inflation as well. If production increases, companies need to keep increasing prices to make a profit. However, this isn't uniform.
For example, in the semiconductor industry, costs increase because of the increased difficulty in fabricating increasingly smaller nodes. Despite this, there are other industries where prices keep decreasing.
Either way, the way to look at inflation is to see it as a tax on the money you already have. That is why you want your money to be locked up in assets that increase in value every year.
The difference between that increase and the inflation rate is your net growth every year. If that growth is constantly positive, you are on your way to success every year.
Putting Yourself In a Position to Not Have to Worry About Inflation
Another important strategy for beating inflation is to be in a financial position that does not require you to even think about it. The main reason that people think about inflation in retirement is that they eventually have shrinking purchasing power.
However, with the right investments, inflation will be something that you don't even think about. Your returns will be so exceptional that you will focus on enjoying life instead of figuring out what investments are the correct ones for your situation.
General Rules of Investing
It is now exceedingly clear that the main route to beating inflation during retirement will come from investments. The way you invest during your working years is what will help you during retirement.
You will need to choose great investments that have a history of providing excellent returns. You also need to actively manage things for many years to ensure that nothing goes wrong.
A variety of physical and soft assets will do the trick. Precious metals are an excellent choice for investing, but it is often something that people don't think about for retirement. However, they miss out on a lot when they avoid precious metals.
Precious metals, like gold and silver, have an excellent track record of providing returns that are above inflation. They are also a great store of value, so you are hedging against societal breakdown.
When things get really bad, people often move towards using gold and silver as currency. While we don't foresee that for a long time, it is something for you to think about. It might even provide a great option instead of going to a bank.
A well-rounded investment strategy to beat inflation will often involve many different types of precious metals. For example, many other types of metals like copper aren't considered precious, but they can also be an excellent option for investing.
These "non-precious metals" can also help you add some variety to your portfolio. Variety is ultimately the most important thing when trying to build a portfolio. You don't want to rely on one asset class over the other.
Get Rental Income from Real Estate
Real estate is one of the most useful ways to have cash flow during retirement. In fact, a good retirement strategy should involve a small portfolio of real estate properties. You should have a few properties when preparing for retirement.
The good thing about real estate is that you have multiple options for making a return. You can get a good return from rental income, which is great because you are getting excellent liquidity.
You can also get a return from the increased value of your underlying asset. On top of that, there are even real estate investment trusts that allow you to benefit from real estate without owning any underlying properties.
Finally, the best thing about real estate is that it allows you to have a physical asset that you can use when things get bad. That is because you can always live in the home if everything else fails.
Focus On Divided Paying Stocks
Dividend-paying stocks are excellent because you get money each quarter based on how many shares you have. If you will invest in individual stocks, your best choice is to focus on ones that pay a dividend back to investors.
The benefit you get from these stocks is that you will continually profit without worrying about the underlying value of the stock. You can then reinvest those earnings back into more stocks. It can act as a perpetual motion machine.
This option is the correct one for people who are not looking to make risky investments in the short term. It is the perfect choice for people trying to build long-term solutions.
Invest In Crypto Currencies
Cryptocurrencies like bitcoin are relatively new. However, they offer an excellent option for people looking to beat inflation. That is because there is so much volatility in this market right now.
There are also many cryptocurrencies, so you have a lot of options when making a decision. The only downside here is that these currencies are often risky and volatile. That volatility can really hurt you if you make a bad investment decision.
The key here is to focus on the cryptocurrencies that seem like they are fundamentally strong. These cryptocurrencies will continuously go up in value, and you can be confident that they will be valuable in the future as well. These choices can make the difference between success and failure for your portfolio.
Finally, a major issue to think about with cryptocurrencies will be future regulation. Governments seem intent on stopping cryptocurrencies from becoming more mainstream. That is a risk factor you need to consider before you put any money into it for your retirement.
Index funds are a great option for people looking for simple strategies that don't have a lot of downsides. The market increases at an average of about 7% per year. By putting your money into a good index fund, you can be confident in returns of that nature.
These funds are a great way of increasing your portfolio every year. That will provide the value you need to be more confident when retiring. The big issue with index funds is that the market does not go up or down uniformly. There will be periods when it grows more than 7%, and the reverse is also true.
You will need a combination of index funds and other assets to balance things out. The right mix of these assets can help you avoid any problems that will come from your index fund not being ready when you retire.
The best thing about index funds is that they are easy to set up. Since you are not purchasing stocks individually, you essentially put money where it grows automatically. It is a great way to be a passive investor and still do well.
If you are an active investor, you might make index funds be a small portion of your portfolio. By doing things that way, you ensure that you have enough consistent growth to balance out the bad stock picks you will eventually make. Since no one goes perfect when picking stocks, it can help level out your portfolio.
Shrinking Your Lifestyle
Ultimately, no matter how much you try, you may not always be successful in beating inflation in a given year. When that occurs, the easiest thing you can do is to downsize your lifestyle. It isn't always easy to do, but it is certainly possible with creativity and sacrifice.
One of the first things you can do to downsize your lifestyle for retirement is to sell your house. The market has consistently gone up, which will mean you will net a hefty profit. You can then downsize into a small condo or another place.
You can shrink a lot of the amenities you used to have when you were working. For example, you can opt for a cheaper car than the one you have now. Doing simple things like this will help you save a lot of money in the future. It will also ensure that inflation doesn't touch you in a given year.
Finally, you can simply adjust your budget downwards every month and spend less. This is usually what most retirees do, and it is the safest strategy for achieving your goal. If that doesn't seem ideal, you should opt for a more aggressive investment strategy during your working years.
There are many strategies here that will help you beat inflation. However, the key strategy is to always be on your toes. When you pay attention, you increase the chance of finding great investment options to help you prepare for when you inevitably retire. You also put yourself in a position to be successful.
You should also focus on physical assets like precious metals, as they will come in useful if things really go bad. Precious metals are very underrated in this regard, and they can help you diversify from traditional soft assets.
When you combine everything, you should have a balanced portfolio to beat inflation when an asset class has a bad year. Follow the strategies that I have put forth, and you maximize your chance of success when you retire.