When most investors consider risks to their portfolio, they are looking at stock-market fluctuations or other short-term up-and-down moves represented by red text on a news ticker. While these risks can affect your bottom line, at least in the short term, there are other types of risk to understand and manage.
You can read more about these risks in this MOAA.org article, but given economic trends, let’s pay some extra attention to the first item on that list: Inflation risk.
- The Basics: Inflation risk can take investors by surprise if they’re not paying close attention. You may not track with this loss in value because your account balances aren’t dropping – they may stay the same or even get larger, but your real purchasing power will decline when inflation’s factored in.
- Areas of Concern: Some financial products are more exposed to inflation risk than others. A locked-in, low-rate CD, for instance, may not keep up with inflation rates, and you’ll have limited ability to make changes without incurring penalties. You may also have funds in a pension or an insurance annuity that comes without an inflation adjustment, meaning the payout will feel much lower than it looked when you established the account years earlier.
[RELATED: MOAA’s COLA Watch]
- Do the Math: Like using financial calculators to help establish your investments and financial plans? Many of MOAA’s calculators factor inflation estimates into the planning process; be wary of those that do not. Want to do your own research on past inflation tendencies? The Bureau of Labor Statistics has an online calculator dating back more than a century.
- ‘Beating’ Inflation?: As stressed in other MOAA.org articles, over long periods, markets tend to outpace inflation and taxes. Beware of quick fixes and short-term strategies. Don’t over-adjust for any external forces, and consult your adviser before making any major changes.
- COLA 101: Like Social Security payments, your military retirement payments are indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That indexing helps combat inflation when it comes to your earned retirement, but it’s been challenged by lawmakers in the past. Learn more about that process, and see how MOAA has fought to preserve the value of your earned retirement, at this link.