Inflation keeps eroding the value of your investments in the long term, which prompts experts to suggest inflation resistant diversifiers as part of portfolio. They are of the opinion that having investment in a mixture of asset classes helps in reducing inflationary shocks to savings.
The biggest threat to your money is inflation, as it not only impacts the current value of your money but also diminishes the worth of your future savings across various asset classes. What inflation does is when you eventually realize or redeem your savings across assets years later, you find that their value is significantly less than it is today. So even if you save a lot for your retirement, inflation will keep lowering the value of your savings over the years.
However, if you plan your retirement wisely and take steps to safeguard your savings from inflation, there are several strategies you can use to help shield your finances from rising prices and protect your savings to some extent.
Retirement is a phase in one’s life that many look forward to, and there are systems in place that help such people make strategic financial decisions in order to achieve an enjoyable post retirement life, says Rohit Garg, CEO & Co, Founder of Olyv. All these factors, however, make one sad as they struggle to preserve the little savings they have from the terrible vice of inflation that belittles the purchasing power of money over time, he adds.
For the safety of any retirement corpus, four simple recommendations should be considered, says Garg as he discusses ways to safeguard savings from inflation.
“First, investment should be made in different types of assets – equities, fixed income and property in order to provide protection against risk. Second, Investments with forms of return which are limited to certain levels of indexation, such as TIPS, should be made. Third, some amount of money out of savings should be set aside for certain categories of expenditures lasting 1 or 2 years, as a precaution against trouble. Fourth, Monitor, assess and make changes to your retirement portfolio on a regular basis, in line with the changes in inflation from time to time,” he explained.
Echoing similar views, Ramkumar S, Partner, Grant Thornton Bharat, says inflation is an Achilles’ heel for all investors as it erodes their savings during periods of high inflation and this is the case across the world where central banks are trying to arrest inflation with fiscal stimulus.
Fiscal stimulus can be in different forms one way is by reducing spending to arrest demand or raise interest rates to keep prices in check and later is what many central banks are doing at present,” says Ramkumar S.
Investors will have to follow a similar queue to protect savings during inflation, says Ramkumar S as he suggests some crucial measures to safeguard one’s savings against inflation.
Diversify portfolio with inflation-resistant investments:
One should consider adding some inflation resistant diversifiers as part of portfolio, suggests Ramkumar S. Having investment in a mixture of debt and equity will always help in reducing inflationary shocks to savings, he says and adds that as inflation tends to more severe towards debt investment.
Take a close look at your budget:
Rising prices tend to have a greater impact on discretionary spending, as consumers are likely to cut back on nonessential expenses, he says.
Cash is not king during inflation:
“One should not retreat from the market and reallocate some of your assets into a cash position. As holding cash can be counterproductive as the intrinsic value is eroded. Its important to stay invested,” according to Ramkumar S.
Reassess your emergency savings:
Some investors may want to keep more cash on hand in an emergency to arrest rising costs. In this case it would be good to park in FDs as this will give higher return owing to higher interest rate owing to higher inflation, says Ramkumar S.
But the bottom line is just like the central banks do it to keep monitoring one’s portfolio and ensure rebalancing of asset classes, he concludes.
