Concerns about rising inflation are everywhere. If you're already retired and living off your investment income, you may be especially worried, regardless of the size of your savings.

You may ask yourself many questions. Will your retirement plan be able to withstand higher prices? For how long? And how high will inflation go? Will it add to the volatility in the stock market? Will it prompt the Federal Reserve to raise interest rates sooner than expected? Perhaps most important, will it impact your lifestyle?

For now, even experts have more questions than answers about how high inflation will go, and what it means for the economy—and you. That's because inflation is made up of various components, some driven by short-term, pandemic-related factors and others that have been long-standing, like the rise in health care costs.

“Inflation is real but has generally been hard to predict throughout time. That is why it is so important that your portfolio is diversified beyond just stocks and traditional bonds. Your portfolio should include asset classes that have historically protected against inflation for example Real Estate and TIPS, treasury bonds issued by the US government that protect against inflation. This may seem overwhelming; the good news is that there is a simpler approach to investing: The UC Pathway Funds are a fully diversified portfolio that includes these asset classes already, all within one fund,” says Jagdeep Singh Bachher, UC’s Chief Investment Officer and Vice President of Investments.

The UC Pathway Funds are Target Date Funds, an asset mix of stocks, bonds and other investments that automatically become more conservative as the fund approaches its target retirement date and beyond. Principal invested is not guaranteed. Remember that past performance does not guarantee future results.

Here's how having a diversified investment plan can help address some of your top concerns regarding rising prices and your lifestyle.

1. SHOULD I CHANGE MY MIX OF INVESTMENTS?

First and foremost, you are not alone having to answer this question. A UC-dedicated workplace financial consultant can help you review and if needed fine-tune your investment mix. This is a service of the UC Retirement Savings Program, so it’s available to you at no additional cost.

It is important to remember that most retirees already have some inflation-adjusted protection through Social Security, and some may have inflation-adjusted defined benefit pensions or annuities with cost-of-living adjustments.

Once more, an easy way to make sure your savings are adequately protected against inflation is to consider investing in one of the UC Pathway funds.

However, if you prefer to create your own investment mix, you may want to consider these options, available in the UC Retirement Savings Program’s fund menu:

• Domestic stock investments can grow through inflationary periods, as businesses can pass on higher prices to their customers.
• Foreign stock investments can also do well, particularly when inflation is specific to the U.S. economy.
• Specialty stock investments such as real estate investment trusts (REITs) may do well if higher inflation causes the price of real assets to increase.
• With bonds, you might want to think about inflation-protected bond funds, which can perform well as inflation rises.

And if the inflation outlook radically shifts higher because of unforeseen circumstances? The same strategies would still apply. Diversification is a time-tested way to hedge against the risks of inflation.

Do keep in mind that diversification and asset allocation do not ensure a profit or guarantee against loss.

The effect of inflation on retirement expenses

Even moderate inflation drives up your annual expenses over time. If you begin your retirement with an annual withdrawal of $100,000, see what your lifestyle will cost after 25 years at 3 different rates of inflation.

Source: Fidelity Investments, August 6, 2021. Fidelity analysis based on a hypothetical portfolio of $2.5 million with a drawdown of 4% that assumes no growth, taxes, or inflation for simplicity. The hypothetical is not intended to predict or project the investment performance of any security.

2. SHOULD I HAVE MORE IN CASH OR LESS?

If you think your retirement lifestyle is going to cost more in the future because of inflation, your instincts might be telling you that you need more cash available for everyday expenses.

For some retirees, that cash allotment is just a few months of spending, or maybe the amount needed yearly as a required minimum distribution from their UC 403(b), 457(b) or DC Plan accounts. For the more conservative, it could amount to a few years of living expenses or more, depending on how they feel about the potential for withstanding a market downturn.

But assuming you have a solid retirement income plan in place now, you might want to consider doing just the opposite if you are particularly worried about inflation: Hold less cash and invest for growth potential. 

3. HOW CAN I INSURE AGAINST THE UNKNOWN?

Rising costs for a trip to Hawaii are one thing. Rising costs for prescription drugs and hospital care are on another level. Health care costs have been rising faster than the rate of inflation for years and will likely continue to do so. Make sure your retirement plan includes adequate assumptions for future health care costs.

Depending on your needs and your financial situation, you may also want to assess your insurance needs. If you are still working in retirement in some capacity and count on that income to cover your spending, consider life insurance and disability insurance.

You may also want to explore long-term care insurance. Even if you think you have enough to cover the costs involved, you may have to lower your standard of living or adjust what you plan to leave to heirs in order to spend more on health care, especially if that care is going to run higher than the industry averages.

NEXT STEPS TO CONSIDER

Whatever direction inflation eventually goes, the key is having a plan that can enable you to live the life you want.

Contact a UC-dedicated workplace financial consultant for help finding the strategy that works for you.