Investing Retirement Dollars During Times of Inflation
By Michael Haggerty, CRPS, Member, ADP Strategic Plan Services and Institutional Investment Consultant*
Making smart investment decisions requires a holistic approach. By understanding how inflation and purchasing power may impact the value of investments, retirement plan sponsors and participants can proactively mitigate risks and seize opportunities for growth.
When prices increase, purchasing power shrinks. That's inflation in its simplest terms. Amid market volatility and rising inflation rates, it's critical to pay attention to how these factors may impact returns on investments and ultimately, financial security in retirement.
Most economists agree that a 2% rate of inflation is indicative of a healthy economy and stable prices. The Consumer Price Index (CPI) measures inflation by tracking the changes in prices that U.S. consumers pay for goods and services. Following significant spikes related to the pandemic, the rate of inflation has slowly declined since mid-2022 when it reached a high of 8.2%. As of April 30,2024, the 12-month inflation rate reported was 3.4%.
Forty percent of American workers are planning to delay retirement because of inflation. Additionally, fluctuations in the market can lead to significant losses if retirement plan investments aren't carefully managed. When it comes to investments, it's important to look at the big picture when creating a portfolio to sustain a comfortable retirement. Consider a diversified asset allocation that may protect against both inflation risk and market risk. Of course, diversification does not assure a profit or protect against market loss.
Rethinking retirement investments
Contrary to popular opinion, investing is a smart way to protect the value of your money for long term purposes. For example, while high-yield savings accounts are available, investing in stocks and bonds may offer returns that surpass the rate of inflation over longer periods. But among the potential risks to consider when devising a savings strategy, inflation risk is often overlooked or unaccounted for in long-term plans.
Investors who are nearing retirement tend to focus on market risk. As a result, they may select shorter-term, less volatile investments to lower these risks. But there's a downside to conversative investments. Ignoring inflation risk may decrease the chance that their savings keeps pace with future prices.
When inflation is on the rise, it's essential to evaluate investment choices through the lens of purchasing power risk, which can diminish the real value of investments over time. A diversified investment portfolio — with assets that can potentially outpace inflation — can help investors combat and weather the negative effects of diminishing purchasing power.
It's always a smart practice to review investment allocations to manage risk and minimize potential losses. Staying informed and building an adaptable strategy is necessary to navigate the complexities of the investment landscape and achieve long-term success.
Opportunity in volatility
Market volatility underscores the importance of having a long-term investment strategy that can withstand fluctuations in the market. Savvy retirement plan investors will understand that regular payroll deferrals will result in dollar-cost averaging, so there's no need to try to time the market.
As a plan sponsor and fiduciary, you're charged with offering participants investment options that help them align their portfolios with their risk tolerance and goals.
A financial advisor can offer investment suggestions, but the final decision is ultimately yours as the plan sponsor. An investment manager, on the other hand, is tasked with choosing and monitoring the funds in your retirement plan, keeping your best interests in mind and protecting you and your organization from liability.
ADP Strategic Plan Services (SPS) provides its retirement plan clients with investment services that help effectively manage their investment fiduciary obligations, gain access to a diverse group of funds and offer their plan participants a diversified investment option menu to select from to meet an array of retirement saving strategies.
Learn how we can help you and your plan participants make the most of investing during times of inflation.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
*Registered representative of ADP Broker Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 and Associated person of ADP Strategic Plan Services, LLC (SPS) an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services. M-559742-2024-06-13
