Inflation has become a daunting word to investors.
There is a fear that the assets being invested today won't sustain inflation in the years to come.
It has the potential to inadvertently chip away as your hard-earned retirement.
Understanding how inflation may affect your retirement requires a dedicated and structured plan.
Whether you plan to retire in 25, 15 or even just 10 years, you should be thinking about inflation.
Just as the dollar today doesn't go as far as it used to, the same will follow suit in years to come as the cost of goods and services continues to rise.
Your investments will have to work that much harder to compensate and maintain your standard of living throughout retirement.
Take your food bill, for instance.
If you have a monthly food bill of $350 today, that same bill will jump to $470 over the next 10 years with an inflation rate of 3%.
Apply this thinking to other areas of your life and it's easy to see how critical it will be for your investments to outperform inflation.
Being prepared for retirement is important, but it's also important to prepare for the longevity of retirement.
The cost of health care commonly increases as retirees grow older.
Adding this to the mix makes it all the more difficult to maintain your standard of living.
Investors today are not only consumed with having a comfortable retirement, but they also wish to pass assets on to loved ones.
All of these goals of longevity, comfort and passing wealth can be achieved through a properly structured portfolio.
The first step is to ensure that your portfolio is constructed in a way that at least keeps up with inflation.
If you shy away from market risk and invest too conservatively, your assets will lose the ability to keep pace with inflation over the years.
On the other hand, if you invest too aggressively you will find yourself at the opposite end of the spectrum.
While stocks have the potential to counterbalance inflation, they pose a much larger market risk and can leave you with a heavy loss.
In order to obtain the appropriate balance between inflation and market risk, it's best to consult a financial advisor to develop a long-term retirement plan and review the plan periodically to stay on track.
Once you have a solid strategy in place, it's essential to observe your retirement spending closely.
If you have regularly occurring distributions, make sure that they are being adjusted to the current rate of inflation.
Work with your advisor to maintain flexibility in your investments that will allow you to increase or decrease your distributions if necessary.
When unexpected expenses arise, you need to be ready to adapt to them.
You will also want to be able to increase your cash flow down the road in order to preserve the same spending power throughout your retirement years.
Increase your cash flow cautiously or you may be at risk of depleting your assets too quickly.
Keeping up with inflation and maintaining your standard of living is truly a balancing act.
Work with a financial advisor to make sure that your risk tolerance and objectives are being met in a portfolio that is ready to face the assault of inflation.