Inflationis an important point to consider while planning for retirement. Retirees oftenignore it. Currently, the inflation rate is at 1.9%. The average rate between1914 till today is recorded as 3.26%.
It maynot seem a significant percentage. But it has a profound effect on one’seconomical and financial life. 2% inflation rate will influence one’s living by50% over a span of 20 years. It varies as a double proportion. For example, ifit increases by 4% then it the same span of time price will be more thandouble. It is the responsibility of Federal and state pensions compensate forinflation. The relaxation is not provided by private pensions.
Retireeswho face a long retirement span need to devise a strategy to cope withinflation situation. People should seek advice from their financial advisorwhile taking major financial decisions. There are four ways by which the assetvalues of retired persons can be protected and maintained by offeringprotection to inflation.
Make investmentsin Dividend Aristocrats
Acompany in the S&P 500 that enhance its dividend one time annually for aperiod of minimum 25 consecutive years is known as a dividend aristocrat. Thepresent number of dividend aristocrats as of 2019 is 57. Companies such asJohnson & Johnson (JNJ) and ExxonMobil (XOM)
One point is must considerable by investors that no stock involves a dividend amount when buying stocks. Value of stock increases with dividend when dividend streak runs for a longer time. It can result in severe circumstances over many years when the payout is cut by dividend aristocrat. These companies go for a situation where they are in a position to not end annual payout increases.
It is considered safer for investors to buy individual stocks. Most risk avoiding investors opt for dividend aristocrat exchange-traded fund such as the ProShares S&P 500 Dividend Aristocrats Index(NOBL). The payout on NOBL varies at different times. A remarkable increase of44% has been recorded. The rate varied from $1/share in 2015 to $1.44/share in2018. The inflation rate was recorded as 5.94% in the same period.
The attitudes of investors vary with stocks. Often, dividend aristocrats go for rising dividends to increase income rate to deal with inflation without considering the risks.
Real EstateInvestment Trusts is here to protect your funds
REIT hasthe position of working as stock portfolio involving real estate holdings. Theyhave got hold of finance real estates that deal in different types ofproperties and give an income as output. Most dealers focus on one type ofproperty. It can be offices, apartments or industrial locations. There are manyother different property options available. Some choose to stick to onlymortgages.
If acompany is at the position of REIT, then it is bound to invest net income at therate of a minimum of 90% from its assets as dividends. Income coming from the propertyis free of federal income tax when it is through the exchange process. REITswork exactly like a stock but it has got some extra benefits for investors. Itallows investors to make investments in real estate without any money spent onmaintenance issues which come up while dealing in rental property.
Elevatedproperty values increase the assets of stock eventually. Inflation also showsan increase in its figures. There would be more rents with the rise ofinflation. But there is a relaxation in the situation. Due to the 90% payoutrequirement, higher rents will be compensated by higher dividend outputs over aspan of time. This provides a financial security blanket to investors againstdeclining currency along with a setup source of assets in the form of cash.
Save funds ascommodities
When we are talking in business jargons, then the commodity can be defined as “Any partially processed & unprocessed goods” It can be Gold, Oil, Cotton, Corn, Orange juice and electricity. They hold some monitory values and serve as constituting stones of any community or civilization. In contrast to this, the currencies managed by the government which we use to buy these commodities do not possess same monitory value all the time. There can be seen ups and downs in the value of the currency.
There canbe seen much fluctuations in value tag attached with commodity. It is reallynot appreciable that vendors hoard up money in the form of these commodities.It can be seen among people when they are hiding up some extra gold bars andcotton to earn more. Investors should go for general commodity ETFs. Invesco DBCommodity Tracking fund is highest in rank. DBC and similar funds also have aname. It is seen that these funds values rise with the declined value of the dollar.
Inaddition, these funds protect the investors from grave loss when there isencountered an individual commodity crash. Individual investors can utilizethese funds to manage funds when there is a high rise seen in commodity prices.
TIPS – A lifesave
Treasury Inflation-Protected Securities are the bonds releases by the US Treasury. They hold a different principle value from other bonds. The value of a bond is related to the price index of the investor. Principal amount varies with up and downs of inflation. TIPS regulate its principal amount value twice in a year as per CPI and pay tax found on the new value. They carry no risk of default. It is guaranteed by TIPS that all of the principal amounts will be paid upon completion of tenure of the bond. There is no interest rate on TIPS. In a lower inflation environment, TIPS return a lower value. It is beneficial for TIPS investors to add conventional bonds in the cart when there is a lower inflation rate.