For months on end, consumers have been grappling with rampant inflation. In fact, the most recent Consumer Price Index pointed to an 8.6% annual increase in the cost of consumer goods.
Inflation is up to such an extreme that experts are already anticipating a large Social Security raise in 2023, since those increases are pegged to inflation. But while that may be a good thing for seniors in theory, in reality, many retirees are buckling under the weight of rising expenses.
If you're worried inflation will impact your retirement and cause you to lose buying power, then you'll need to invest in a manner that's likely to help you keep up. And in that regard, real estate is a good bet.
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Why it pays to look to real estate
Let's be clear: The rate of inflation we're looking at today is not normal. Between 1914 and 2022, the average inflation rate was 3.17% per year. Today's rampant inflation is largely a result of supply chain hiccups occurring at a time when consumers were flush with cash thanks to a broad economic recovery and stimulus policies.
But it's important to do what you can to keep up with a more moderate rate of inflation, too. And that's why it could pay to add physical real estate to your investment portfolio.
While the housing market has seen explosive gains over the past year or two, generally, home prices appreciate 3.5% to 3.8% a year on average. But in some markets, you can do a lot better. And if you invest in an income property during your working years, it could set you up to enjoy your fair share of buying power once you retire.
Not only might your property appreciate nicely in value over time, but if rental demand continues to soar, you might manage to collect more than enough money from your tenants to cover your mortgage, property taxes, and maintenance costs, leaving you with steady profits. Plus, if you hang on to your rental property during retirement, the rent payments you collect can serve as yet another income stream until you decide you're ready to sell.
Diversification helps, too
It's important to invest in a manner that will help you keep up with or outpace inflation. But it's also wise to invest in a broad range of assets. And so if your portfolio mostly consists of stocks and bonds, it could pay to add physical real estate to the mix.
Right now, stocks are down in a very big way. But the residential real estate market is still showing some impressive gains. That illustrates the importance of owning different types of assets -- you get some protection when certain asset classes are hit harder than others.
Of course, owning an income property isn't without risk. You could end up with vacancies, tenant issues, and a host of costly repairs through the years. But as long as you understand those risks, buying real estate could be a good bet -- especially if inflation is something you're actively worried about.
