Money Burning

Source: Flickr user Mike Poresky.

So you've done your part to save for retirement, diligently contributing to your 401(k) and saving as much money as possible to fund your post-working years. That's the good news. The bad news, however, is that there's a nasty little beast just waiting to gobble up your retirement savings.

It's called inflation.

We don't always think of inflation as a major retirement roadblock. And why would we? For most of us, our purchasing power remains fairly stable from one month to the next, so we're less likely to contemplate how much things will cost down the line. However, we can't rule out the possibility that inflation will rear its ugly head and dash our retirement dreams in one fell swoop.

It's not such an unlikely scenario. According to a study by the Senior Citizens League, since 2000, seniors have lost about 31% of their buying power. In other words, for every $100 in expenses seniors could afford back in 2000, they can only afford $69 today. Moreover, since 2000, the Social Security Administration's cost-of-living adjustments have boosted benefits by just 41%. Senior living expenses, meanwhile, have climbed 84% in the past decade and a half, leaving a fairly sizable gap to be bridged. In fact, COLAs have been growing at record low levels since January 2000, and those receiving Social Security didn't get a raise in benefits at all for 2016.

Even low rates of inflation can render the average retiree's savings inadequate, and clearly, Social Security can't be counted on to pick up the pace. If you're serious about securing a financially stable retirement, then you'll need to take matters into your own hands.

Get aggressive -- and creative
If you have several years (or even decades) before retirement, consider loading up your portfolio with stocks, which have historically delivered higher returns than bonds. While it's true that stocks are a riskier investment, they also have a strong track record of beating inflation. Between 1926 and 2009, despite their inherent volatility, stock returns managed to outpace inflation by an average of 6.8% a year. Another potential high-risk, high-reward option is real estate, which also has a knack for kicking inflation in the tail. If you have the capital to invest in an income property, you might consider doing so in an area that's up and coming or has a strong rental history. If all goes well, you'll benefit from rental income while your property appreciates in value.

Consider TIPS
As the name implies, Treasury inflation-protected securities are designed to be inflation-proof. If inflation increases, as defined by the Consumer Price Index, then the value of your TIPS investment will go up. Backed by the U.S. government, TIPS are considered a low-risk investment. Interest on TIPS is paid twice a year, guaranteeing a steady income stream. They can be purchased directly through the TreasuryDirect system in $100 increments, and you can choose between a five-year, 10-year, or 30-year maturity. You'll even catch a minuscule tax break, as interest payments and increases in principal are exempt from local and state taxes, though they are taxable at the federal level.

Ladder your bonds
Lots of people like bonds because they're a relatively safe way to earn a consistent return. The downside is that bond interest rates often fail to keep up with inflation, and by locking yourself into a fixed long-term rate, you could be setting yourself up for disaster. If you're going to invest in bonds (which, if you're nearing retirement, you should), then ladder your investments so that their maturity dates are evenly spread out across a number of years. With a laddered approach, you might have one bond coming due in three years, another in five years, and another in seven years. This way you'll have access to your money at various intervals, and with that comes the opportunity to reinvest when interest rates are most favorable. The higher the interest rate you're able to snag, the more likely your investments are to match or outperform inflation.

Adjust your expectations
It's the answer no one wants to hear, but it's one you need to consider nonetheless: If your investments aren't growing quickly enough to keep up with or outpace inflation, and you only have a limited appetite for risk, then you may need to make certain lifestyle adjustments -- either now or in retirement -- to compensate for your reduced spending power. This could mean working part-time during retirement, living more frugally before and during retirement, or delaying retirement altogether until you've accumulated enough savings to finance the lifestyle you desire.

If your goal is to secure a comfortable retirement, one of the biggest mistakes you could possibly make is ignoring inflation or pretending it isn't a problem. Remember, even a brief period of inflation can be devastating when you're living on a fixed income, so the sooner you take steps to make your investments inflation-ready, the better off you'll be in the long run.

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