Inflation is your biggest threat. Here's how to cope with it.
Right now, most older investors probably feel like they've survived a near-death experience. Yet despite the fact that retirement portfolios have recovered much of their losses from 2008, if you're in or nearing retirement, you still have to be diligent about making sure you'll have enough money to last throughout your golden years. By making the right financial moves, you can make your money last a lot longer.
But what about the biggest concern facing retirees and near-retirees today: whether they'll run out of money? Sure, there are many different risks that older investors have to face, but by managing those risks, you can enjoy a comfortable retirement.
Soaring after the crash
This time last year, those close to retirement were in a panic. The FTSE 100 was just about to fall through the 4,000 level, and was down a whopping 40% from its July 2007 peak. That translated into hundreds of thousands of pounds in losses for many retired investors, most of whom had few ways to restore their lost wealth by going back to work.
Now, though, the tide has turned. The FTSE 100 is up 50% from its March 2009 lows, with the Great Stock Market Rally rescuing many retirees -- if they stuck with their investing plans and didn't jump ship at the worst possible moment.
Even after the rally, though, there are still many risks out there for retirees. The toughest thing about saving for retirement, of course, is not knowing exactly how much money you'll actually end up needing. If you spend more or live longer than you expect, then you might not have enough saved up. If you make investment mistakes, they can cost you much-needed cash at exactly the wrong time.
Perhaps the biggest risk retirees face is inflation. It may not be a factor right now, but with retirees needing to make their money last 30 years or more, it definitely will be at some point.
Handling inflation risk
The worst times for retired investors aren't periods like the 1987 stock market crash. Rather, retirement nest eggs faced the greatest threat during periods of high inflation, as we saw during World War II and the 1970s.
In order to address the threat of inflation, you could try this two-pronged approach. First, retirees could build an inflation adjustment into their cash-flow strategy. A 4% annual withdrawal rate may seem low, but it incorporates an annual inflation adjustment that helps retirees keep up with rising costs over time.
Second, you need to choose investments that will help you fight inflation. Energy companies have traditionally been strong performers in times of higher inflation. With the two big oil companies, BP (LSE: BP) and Shell (LSE: RDSA), paying nice dividends, they can actually do double-duty in a retirement portfolio by not only countering higher prices but also providing dependable income.
More generally, companies that can pass on any higher costs for raw materials to consumers do a lot better during inflationary periods than those that don't have much pricing power – companies with strong brands like Diageo (LSE: DGE) and Reckitt Benckiser (LSE: RB) are in a better position to hike prices and reap the benefits of inflation.
Mixed with an allocation to index-linked gilts, the right shares can help you defeat the inflation monster. You can't prevent inflation, but by preparing for it, you'll make sure it can't hurt you.
More on the economy and the markets:
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> A version of this article, written by Dan Caplinger, was originally published on Fool.com. It has been updated by Bruce Jackson.
