How to Manage Your Pension While Inflation Soars

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As inflation surges to record highs, retirement savings are feeling tight, which makes it all the more important to make sure your savings are working for you.

US Inflation up 8.5% year on year in March hit a 40-year high as the war in Ukraine pushed up energy costs, the latest consumer price index showed on Tuesday. Followed on Wednesday by a spike in producer price index, up 11.2% over the same period last year to hit a 12-year high.

Meanwhile, consumer prices in the UK rose at their fastest pace in 30 years in March, 7% increase from last yearThe Office for National Statistics reported Wednesday.

The latest data add to an already bleak inflation picture, with prices outpacing wage growth in many advanced economies.

The sky-high inflation rates we’ve seen for a year now will wreak havoc both on pensioners and the pension fund itself.

Dan North

Senior Economist, Allianz Trade North America

That could have a big impact on pensions as savers and retirees try to maintain their spending power in the worst-case scenario. cost of living crisis for decades, and pension funds work harder to keep up with inflation.

Dan North, senior economist at Allianz Trade North America, told CNBC: “The towering inflation we’ve seen for a year now will be devastating both to pensioners and the pension fund itself. “.

Pensions feel tough

Among those hardest hit by rising inflation will be retirees, especially those with lower or fixed incomes, whose money has to pay more for non-essential items. discretionary, such as food and energy.

“Where people will be more vulnerable are people who are retired and have no specific annuity,” said David Knox, a senior partner at Mercer Australia. An annuity is a financial product commonly used by retirees to provide a guaranteed lifetime income.

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Even state pensions, which often make an annual adjustment, known as a “cost of living adjustment” (COLA), to account for rising inflation, are struggling to keep up for many years. case.

“The typical pension system offers 1-2% COLA per year. We’re seeing costs go up every month,” said Chris Janeway, founder at financial consulting firm Four Point Wealth. “For people who are retired with a fixed income, it is a huge burden to see their food and travel costs increase dramatically.”

Meanwhile, savers who are still in their working lives may be tempted to reduce or stop their pension contributions, or even dip into their super to cover short-term expenses. term. But financial advisors have warned against such moves if possible.

How to protect your money as a worker

If you’re pre-retirement, experts recommend continuing to accumulate any money you don’t need so you can easily cash in on pensions and investments. That would give it the best chance to hedge against the effects of inflation over time.

“For younger workers, who have time to watch their wages and salaries catch up with inflation, and who, by common sense, may have substantial exposure to the market,” he said. securities” – for example through a 401(k) – “the impact of inflation is unlikely to be damaging in most cases,” says Luke Bailey, senior counsel at the US law firm Clark Hill. in the long term.

Indeed, now could be a good time to boost your retirement savings by putting more money into private retirement or alternative investments.

Individuals may want to consider investing the above and beyond (required contributions) funds into a self-directed retirement account.

Julie Gillespie

Head of market research, TipRanks

“While it’s extremely important to leverage the right company contributions into retirement, individuals may want to consider investing funds higher and further into a self-determined retirement account. direction, along with other investments like real estate,” said Julie Gillespie, head of market research at financial analysis firm TipRanks.

The sooner you get to work, the more risky investments you can consider for the greatest long-term returns. However, as you reach the later stages of your working life, you may want to reduce that level of risk in preparation for withdrawal.

How to protect your money when receiving a pension

If you are retired, there are a number of tools you can consider to better manage your pension, including converting to annuities or purchasing financial products specifically designed to beat inflation. . That could include Treasury Inflation Protected Securities (TIPs) in the US

“Investing in TIPs is a defensive move and won’t win back dollars that have been lost to inflation, but now might be a good time to get exposure to them to protect from the ravages of inflation.” future in a relatively low fashion” Bailey.

Pensioners could also consider moving their money out of banks, where savings are drying up even as interest rates rise steadily, and into short and medium-term investments instead.

“There’s a lesson to be learned there for retirees that if you want to get your money out in the next few years, don’t put it all in the bank. Look for broader investments,” says Knox.

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