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A well-diversified properly allocated investment portfolio will automatically give you a hedge against inflation.  Below is closer look at various investment products and how they can help you keep pace with the rising cost of living and balance your retirement portfolio. • Trust and Estate Planning

 

Stocks

Investment professionals agree that people over the age of 65 should keep as little as 30 to 35 percent in stocks. 

Investors can seek to minimize the volatility of their stock portfolio by making sure that it is broadly diversified, incorporating both large and small company stocks as well as domestic and international shares.

Treasury Inflation-Protected Securities or TIPS

The federal government began issuing Treasury Inflation-Protected Securities in 1997.  Unlike ordinary Treasury securities, the value of these bonds rises with inflation, as measured by the Consumer Price Index.  However, Treasury bills have been yielding poor returns over the last few years.

Real Estate

Despite the recent woes in the housing market, real estate, in moderate amounts, can be an important component of a well-diversified investment portfolio.  Investors today can easily invest in real estate without actually buying or managing apartment buildings or commercial property.  Instead, they can simply steer some of their money into real estate investment trusts, or REITs.  Or they can invest in mutual funds that invest in REITs and/or real estate operating companies.

Commodities

Some investment professionals see commodities as a smart investment today because emerging economies in Asia and Latin America are growing fast and gobbling them up a they seek to feed their growing populations and build out their infrastructure, from highways and power plants to communications networks.  Meanwhile, gold has been a particularly hot commodity lately as investors have flocked to the precious metal, viewing it as a hedge against both inflation and a weak dollar.

Still, given the volatility to which commodities are prey, it is recommended that they account for only a modest portion of an individual’s retirement portfolio.  If you’re 50 and have 15% of your portfolio in commodities, that’s okay but if you’re 70 you should have no more than 5%.

Annuities

Annuities are a unique type of insurance contract that can offer the buyer guaranteed payouts for life.  Increasingly, they are being viewed as a smart way for investors to convert retirement savings into retirement income.  According to a recent survey by Allianz Life, consumers rank annuities the highest in satisfaction among all financial instruments, outpacing mutual funds at 38%, stocks at 36%, U.S. savings bonds at 35% and CDs at 25%.

The U.S. Department of Labor has been looking into ways in which annuities might play a bigger role in 401(k) and other retirement plans, but meanwhile, many individual investors aren’t waiting.  Industry-wide, sales of both major types of annuities, fixed and variable, were up 13% in the first half of 2011 versus the same period a year earlier.

Although their features can vary, the ability of annuities to convert your savings into a stream of income for life is unique in the investment universe.  That income stream is guaranteed by the insurance company (that issued your annuity) to last as long as you are alive, or, if you prefer, as long as you and your spouse are alive – even if the value of the assets in your account falls to zero.

While that guaranteed stream of income is attractive, its purchasing power, over time, can still be eroded by inflation.  To counter that problem, many insurers now offer, for an additional fee, riders to their annuity contracts that provide a cost-of-living adjustment each year, either for a predetermined period of time or for the life of the contract.  For example, the insurer might agree to boost your payout by 3% annually for, say, 10 years.

Annuities are not right for every investor and they are not meant to make up a person’s entire nest egg but they can be a valuable part of any retirement portfolio.  We recommend that investors set aside at least a portion of their nest egg in an annuity to cover basic expenses, and include some provision for inflation protection in that annuity.  That’s an effective way to guarantee a portion of your savings against market turmoil and inflation risk, as well as the very real risk of outliving your assets in retirement.

 

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