In case you haven't noticed, inflation has been rampant lately. The cost of everything from gas to groceries to apparel has gone way up, and we could be in for many more months of high consumer prices before things start to settle down.
But while this recent bout of inflation is fairly extreme, some degree of inflation is normal, especially over time. In fact, if you're many years away from retirement, you can bet that pretty much all of your expenses will end up rising substantially between now and the time you leave the workforce for good.
If that's a concern of yours, it's understandable. Though Social Security is designed to give seniors raises, known as cost-of-living adjustments, to help them maintain their buying power in the face of inflation, often, those raises fall short.
That's why it's important to take steps of your own to combat inflation. And choosing the right investments could be your ticket to doing just that.
An aggressive portfolio is the smart way to go
Ideally, you'll be saving for retirement in an IRA or 401(k) plan so you have money at your disposal outside of Social Security later in life. But it's important to invest your savings wisely to put yourself in a strong position to maintain your buying power down the line.
To this end, loading up on stocks is a good bet. Though stocks are risky, and they carry more risk than bonds, they also tend to deliver higher returns. And you'll need those strong returns to grow your money at a robust enough pace to beat or keep up with inflation.
Let's say you contribute $500 a month to a retirement plan over a 40-year period. If you go heavy on stocks, it's fair to assume that you'll generate an average annual 8% return, because that's a bit below the stock market's average. Stick to that plan, and you'll end up with a little over $1.5 million. That's a nice chunk of money to access at a time in your life when earning money from a job may not be an option (or an option you want to exercise).
If you have an IRA, you can invest your savings in individual stocks. If you have a 401(k) plan, you won't be able to buy individual stocks, but you can try loading up on S&P 500 index funds.
These funds are a good bet for a couple of reasons. First, because all index funds are passively managed, they tend to charge very low fees (unlike some of the other funds you might find in your 401(k) plan). Also, S&P 500 index funds in particular offer instant diversification, since they effectively track the broad market.
Don't let inflation fears drag you down
Inflation is part of our economic cycle, but it also has the potential to make retirement financially stressful. By investing your savings strategically, you can do your part to give yourself an edge, even as the cost of living climbs over time.