How will inflation and the falling dollar affect your retirement income?
October 11, 2007
Only too often future retirees make the mistake of calculating future income needs on what things cost today. It is hard enough to save for retirement in good times, but with inflation an unknown factor and the endless fall of the dollar, things are getting even tougher.
Exactly what does a falling dollar mean to your retirement? A falling dollar means losing buying power in relation to other currencies. For example, when the dollar falls against the euro, it is more expensive for Americans to pay for lodging and food in countries that use the euro.
What does inflation mean to your retirement? It means that what you can afford to buy with a fixed amount of dollars today will cost you more in the future. We all have heard the stories of when gas was 25 cents a gallon and a candy bar was a nickel.
How much does it cost to purchase the same things today? That is the effect of inflation and if not properly planned for, it can cause major problems.
So what can you do to protect your portfolio from these problems? One way is to position foreign currencies into your portfolio in the form of international CDs, money markets or exchange trade funds that track a certain currency.
There are many currency ETFs available. Be aware that buying currencies is a zero sum game because they do not produce anything. If our currency goes up in value, that means that somebody else’s went down.
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If you are not comfortable with investing in a foreign currency, you can invest in stocks, bonds and funds with international exposure. Most people need some international exposure, but how much depends on your situation. With foreign markets becoming increasingly valuable as a currency and inflation hedge, it is more important than ever to understand the risks associated with foreign investing.
There are other strategies to protect your portfolio against future inflation and currency devaluation like investing in hard assets such as gold, oil, gas and other commodities. What strategy is best for you?
If you are a sophisticated investor, there is a wealth of information out there. For those who do not wish to do their own asset allocations, run, don’t walk, to a qualified financial planner. Retirement dollars, properly allocated, can ease the pain that inflation and currency issues can cause. With the dollar is possibly a long-term trend, you cannot afford to wait and hope that your current strategies will pay off when you retire.
• Carol Perry, of Carol Perry and Associates, has been a resident of Northern Nevada since 1983.