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Published on: 11/22/2023

4 Tips For Guarding Your Nest Egg From Inflation

In today’s shifting economic landscape, guarding your nest egg from the creeping effects of inflation is a challenge that many high-net-worth individuals, families, and retirees face. 

Navigating the complexities of wealth preservation requires a multi-faceted strategy, keeping in mind that the goal is not just to maintain, but to enhance purchasing power over time. The fiduciary financial advisors at Avidian Wealth Solutions are here to offer you a set of practical tips on how you can work to position your investments better to withstand the fluctuations of inflation.

If you’re aiming to secure your financial future and set your wealth up to work for you, no matter what the markets may bring, give Avidian a call and ask how we can help.

What is a nest egg?

Before we dive into the tips, let’s first define what a nest egg actually is. A nest egg refers to a substantial sum of money or assets that have been set aside for retirement or other long-term financial goals. It serves as a financial safety net and offers individuals the means to maintain their desired lifestyle without relying on external sources of income.

Retirement planning services often focus on helping you build and preserve your nest egg, as it is an essential part of setting yourself up for a comfortable and stable retirement. However, with the effects of inflation, simply accumulating a large sum of money may not be enough to secure your future without the incorporation of financial risk management strategies.

The potential impact inflation can have on your nest egg

Inflation is the steady rise in prices for goods and services over time, resulting in the decline of purchasing power. As prices increase, your nest egg’s value is at risk of decreasing, meaning that it may not be able to buy as much in the future as it can today.

For example, let’s say you retire with a nest egg of 1 million dollars, and the inflation rate is 3%. In ten years, that same $1 million will only have the purchasing power of $744,093 in today’s dollars. In twenty years, it will only be worth $552,210. This reduction in value can significantly impact your ability to sustain your desired lifestyle and meet your financial goals.

Therefore, working to protect your nest egg from the effects of inflation is crucial in preserving its value and helping it support you throughout your retirement years.

How to protect your retirement savings from inflation

Regardless of whether you are a pre- or post-retiree, protecting your retirement savings should always be top of mind. When retirement income planning, it’s important to allow for the possibility that inflation and market forces may decrease purchasing power down the line. Worries about your purchasing power diminishing can be difficult to stomach. They may make you anxious and lead you to wonder “Can I lose my 401(k) if the market crashes?” or “What happens to my retirement savings if inflation spikes?”

While no single strategy will provide complete protection, these tips can help you mitigate the impact of inflation on your nest egg investments and work to keep your wealth growing over time.

1. Invest in a diverse mix of assets

A diversified investment portfolio that includes a mix of alternative investment strategies, such as real estate*, private equity, or commodities, in addition to traditional stocks and bonds, can work to mitigate some of the effects of inflation. Through diversification, you can spread out your risk and reduce the impact of any one asset class underperforming. 

Consider including assets such as:

  • Stocks from companies with a history of increasing dividends
  • High-quality bonds and bond funds 
  • Real estate investment trusts (REITs) 
  • Commodities such as gold and oil
  • Treasury Inflation-Protected Securities (TIPS)

Diversification helps to mitigate the risk of inflation because each asset class responds differently to inflationary pressures and any varying market backdrops. For example, stocks may perform well during periods of high economic growth and low interest rates, while commodities like gold tend to hold or increase their value when inflation and interest rates rise.

*Continue reading: Is real estate a good investment for retirement?

2. Consider investing in assets with inflation-adjusted returns

Another effective strategy to offer some protection against inflation is investing in assets that offer inflation-adjusted returns such as TIPS, dividend-paying stocks, bonds, and real estate.

Treasury Inflation-Protected Securities (TIPS), for instance, are bonds issued by the U.S. Treasury, whose principal adjusts with inflation. As inflation increases, so does the principal amount of TIPS. The interest rate is fixed, but it is applied to the adjusted principal. So, as inflation rises, the interest payments increase. This feature helps to protect investors from the eroding effects of inflation on their investments.

Similarly, certain types of annuities can have their payouts adjusted for inflation. An immediate annuity with an inflation rider, for example, would increase your annuity payout each year based on the inflation rate. This helps your retirement income keep pace with rising costs of living.

Remember, there are no true inflation-proof investments, only strategic investments that are a part of a broader diversified portfolio. While they provide certain protections, they may not offer the same potential for growth as other types of investments. Always consult with a financial advisor or retirement planning professional to verify that your investment strategy aligns with your specific goals, risk tolerance, and retirement timeline.

3. Invest for the long-term

The reason a long-term strategy is effective at protecting your retirement is that a long-term investment approach allows the power of compound interest to work in your favor.

Long-term investing also allows for more time to recover from any potential short-term losses from market volatility or inflation. It’s important to remember, however, that long-term investing requires patience and discipline to stay the course during market downturns.

4. Stay informed and adjust your strategies as needed

Staying informed about inflation trends and adjusting your investment strategy accordingly is crucial when working to protect your nest egg. Regularly reviewing your portfolio and consulting with a financial advisor can help you identify any potential gaps in your strategy and make necessary adjustments.

Additionally, staying informed about economic events and inflation projections can also help you anticipate potential changes in the market. A proactive approach to your investments can help you stay ahead of inflation and work to protect your savings.

Take steps towards securing a comfortable retirement with Avidian Wealth Solutions today.

While the strategies outlined above can serve as a guide to help you when guarding your nest egg against inflation, it’s important to remember that no plan can fully shield you from the economic fluctuations and market volatility that may occur over time. 

This information is intended to provide general strategies that can work towards mitigating the impact of inflation, but they do not guarantee complete protection against potential loss. It is therefore crucial to consult with a wealth manager, like the ones at Avidian Wealth Solutions, to make informed decisions that align with your specific financial goals, risk tolerance, and retirement timeline.

Avidian Wealth Solutions is a boutique family office offering personalized retirement tax strategies for high-income earners as well as retirement planning in Houston, Austin, Sugar Land, and The Woodlands. We approach each client’s unique financial landscape with a customized approach that includes risk mitigation strategies.

Schedule a conversation with us today to learn more about how we can help you achieve and protect your dream retirement.

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