In 2022, U.S. inflation hit a 40-year high – after 15 years of near-zero interest rate – with prices for food, housing, gasoline, and other key staples increasing by nearly 10% over the previous year.1
During these uncertain times, stocks and bonds are both on a roller-coaster ride that raises questions for income and growth investors seeking to manage risks and identify opportunities.
For income investors who cover living expenses with Social Security Income, annual IRA distrbituions, and portfolio income, and maybe a fixed pension income, inflation’s erosion of purchasing power can jeopardize a comfortable retirement spending plan.
An official with the Social Security Administration said the annual cost-of-living adjustment at the end of 2022 might be "closer to 8%" due to the current inflation rate that is the highest it’s been in four decades.2 What about in the meantime? What strategies might be helpful to fixed-income investors during rising inflation and ongoing market volatility.
Don't Claim Social Security Too Early
If you may be living on annuity, pension, and/or portfolio income but have not initiated Social Security income (“SSI”) as yet, consider foregoing that income at age 62, or what Social Security Administration regards as “full retirement age”, or until age 72 when your annual lifetime SSI will be highest under current law. Although the right answer does vary from person to person, depending on many factors, each year you put off claiming Social Security will increase your overall benefit amount – if you live long enough to make up the difference.
Use I Bonds and TIPS as an Inflation Hedge
Treasury inflation-protected securities (“TIPS”) and I bonds are two types of investments that are designed to keep up with the effects of inflation without putting the invested principal at risk. They are each issued and backed by the federal government, with interest rates and rates of return periodically adjusted to match the inflation rate. These investments are not without some complexities — for example, cashing in an I bond too early can forfeit a certain amount of interest — but can be a good way to keep funds safe without allowing their value to erode over a period of rising interest rates.
Cut Unnecessary Expenses
It may not be easy to cut housing or insurance expenses. But by cutting the expenses you do not need — from streamlining streaming services to switching to generic brands for food purchases — you might be able to free up some money in your budget to put toward other price increases. If it has been a while since you did a top-to-bottom budget review, now may be a good time.
Rebalance Your Portfolio
Is your portfolio showing an ‘unrealized loss”? Are you invested in ways that take advantage of tax advantaged income? It might not be possible to cut other expenses very easily, but what about cutting taxes?
Periods of market volatility can offer excellent investment opportunities, as well as risks, especially if it might be timely to update your investment strategy in light of the fundamental change that are impacting the financial markets. If you aren’t already familiar with the strategy of ‘dollar cost averaging’, now could be a good time to learn about it. Especially if any investment strategy update might be in order.
If it has been a while since you assessed whether your portfolio still accurately reflects your desired investment objectives, an aligned asset allocation, and a comfortable risk tolerance, then this might be a good time for a review and update. And if you haven’t been taking profits and harvesting tax losses, this could be a good time for that review as well.
Over time, investment portfolios that do not regularly rebalance can move away from intended target allocations. Market prices of different investment classes ordinarily rise and fall at different rates, so your portfolio can become off balance. By selling assets in your overweight classes and purchasing assets in your underweight ones, you may be able to regain your intended asset allocation – and maybe, at the same time, realize important tax benefits.
1 U.S. inflation hit a new 40-year high last month of 8.6 percent, Politico, https://www.politico.com/news/2022/06/10/inflation-new-high-may-00038786
2Social Security official: Benefits likely to rise 8% due to high inflation, https://www.cbsnews.com/news/social-security-increase-cola-2023-8-percent-inflation/#:~:text=An%20official%20with%20the%20Social,the%20highest%20in%20four%20decades.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.
Series I bonds are guaranteed by the US government as to the timely payment of principal and interest and offer a fixed rate of return and fixed principal value. Minimum term of ownership applies. Early redemption penalties may apply.
Asset allocation does not ensure a profit or protect against a loss.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
MacNaughton & Associates and LPL Financial do not provide tax advice or services. Please consult a qualified professional regarding your specific situation.
This article was prepared by WriterAccess.