Inflation scares everyone, but it is especially threatening if you are reaching the end of your working life or if you are indeed retired.

Young investors can sit back and hope for this to pass, while trying to get past today’s soaring consumer price growth by investing in riskier assets such as commodities and cryptocurrencies.

They are lucky, time is on their side.

For older investors, the volatility can be confusing as they have less time to recover from any stock market setbacks, forcing them to play relatively conservatively with their money.

Their investment goals have also changed. As young people seek to build wealth, older investors want to protect what they own and earn income from it.

It’s always a challenge, but it gets even more difficult when inflation is working at full blast to erode everyone’s incomes, as is currently the case with consumer price growth in the United States reaching. 6.2% in October and the cost of living in the UK accelerating to 4.2%.

Low-risk asset classes favored by older investors, like cash and bonds, tend to perform poorly when inflation is on.

“Low interest rates and high inflation make generating retirement income difficult but not impossible,” says Vijay Valecha, chief investment officer at Century Financial.

So what asset classes can you protect against inflation?

Cash

The old expression “money is king” makes absolutely no sense these days.

Cash was dethroned over 12 years ago, when central bankers cut interest rates to almost zero following the global financial crisis in 2008, and then again last year to counter the pandemic.

Now inflation will make their woes worse. Central bankers are reluctant to raise interest rates to curb inflation, fearing it will crush the post-Covid-19 recovery and continue to claim it is “transitory.”

They have good reason to be cautious. In the UK, a 1% interest rate hike would add more than £ 20 billion ($ 27 billion) to interest payments on debt.

The average American savings account pays just 0.06%, according to Bankrate, and the current inflation rate of 6.2% will reduce from $ 10,000 to just $ 9,386 in real terms after one year, destroying its power purchase.

Money is not enough, whether for the young or old, says Rachel Winter, Associate Director of Investments at Killik & Co. “Those who have left their savings in cash in the past year will have seen their money. erode by at the same time, the MSCI World index gained more than 20 percent.

While everyone needs a jar of money they can access in an emergency, if you leave your money in the bank it will only shrink and shrink. Some risk is necessary.

Obligations

Government and corporate bonds are another store of retirement income that now offer more risk than reward.

Bonds pay a fixed rate of income, but this is much less attractive as inflation rises because its value will be eroded in real terms, says Ed Monk, associate director of Fidelity International.

As a result, bond investors are now demanding higher yields before parting with their money. But there’s another catch: When bond yields rise, bond prices fall, which hits existing investors. No one wants to be on the edge of a bond crash right now.

The downside is that they can get expensive when many investors are looking to hedge against this risk and push the prices up, so they don’t always work as a hedge.

Rob Morgan, Chief Analyst at Charles Stanley Direct

Inflation-linked bonds offer some protection, says Rob Morgan, chief analyst at Charles Stanley Direct. “The downside is that they can get expensive when many investors are looking to hedge against that risk and push prices up, so they don’t always work as a hedge.”

Investors can invest in inflation-linked bonds through an exchange-traded fund (ETF). Popular options include the Vanguard Short-Term Inflation-Protected Securities ETF, which currently returns 3.4 percent, iShares 5 Year TIP Bond ETF, which returns 3.88 percent, and SPDR Portfolio TIPS ETF, which returns 4.18. percent.

TIPS stands for Treasury Inflation-Protected Securities, which is linked to US government bonds, known as Treasuries.

Annuities

The surest way to generate a stable income in retirement is to purchase an annuity, which will pay out a fixed, guaranteed income for life no matter how long you live.

Once again, low interest rates have taken their toll. The demand for annuities has collapsed because few people want to lock in their wealth at today’s record interest rates.

A 65-year-old with £ 375,000 in their pension could pay a one-time income worth £ 14,518 a year, said Daniel Hough, financial planner at wealth manager Brewin Dolphin.

That’s a poor return for a lifetime of savings, and there’s another problem. Level annuities play a flat rate of income, making them a wealth destruction machine when inflation takes off.

After 20 years, this income would be worth £ 7,895 per year in real terms if inflation averaged 3% per year. If it averaged 5%, its value would drop to just £ 5,204. “Inflation regularly erodes your purchasing power,” says Hough.

You can get inflation-protected annuities, but they pay a lower initial income, especially if you buy a joint life annuity that pays your spouse or partner 50% of the income if you die before them.

In this case, £ 375,000 would only earn you £ 5,800 of income in the first year of an indexed or “escalating” annuity. “It will increase over time, but it’s not a good deal for a living,” Hough said.

He now recommends annuities only in special circumstances, usually when people have a specific need for a secure income and their costs are unlikely to change much. “They may also be suitable for single people without dependents as their pension payments will cease upon their death and cannot be passed on.”

Some annuities allow you to pass on some unused wealth, but that further reduces starting income, Hough adds.

It may be worth investing a small portion of your portfolio in annuities to provide you with basic retirement income that will never run out, says Valecha.

Which brings us to the last option.

Stay invested

Traditional methods of generating income in retirement have been destroyed by low interest rates and rising inflation. The best way to fight back is to leave your retirement funds invested in a diversified portfolio of inflation-hedging assets such as stocks, real estate and inflation-protected bonds, says Valecha.

There is room for gold even if it does not generate income. This is about hedging your exposure to stock market volatility, while cryptocurrencies do not earn any income.

Equity income funds are perhaps the best way to generate both dividends and capital growth in retirement, says Valecha, who recommends so-called “dividend aristocrats” that have a reputation for increase their payments for decades.

You can access these type of stocks through State Street Global Advisers’ SPDR ETF range. The SPDR S&P US Dividend Aristocrats UCITS ETF currently returns 2.2%, the SPDR S&P UK Dividend Aristocrats 4.72% and the SPDR S&P Euro Dividend Aristocrats 3.43%.

SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF, which tracks companies in the Asia-Pacific region, reports 3%.

“Dividends provide you with a recurring stream of quarterly or monthly payments providing a reliable source of income in retirement and reducing the risk of outliving your assets,” said Mr. Valecha.

Mr. Hough also claims to have a diversified portfolio of investments with exposure to equities. “A prudent portfolio of £ 375,000 could realistically generate an increasing income of around £ 15,000 per year,” he said. “That would give you both capital growth and a constant level of income, with overall smoother returns. “

He suggests spreading your money across different geographies, sectors, and asset classes, so that not all of your eggs are in one basket. “This could include a range of stocks, as well as real estate, gold and commodities, and a mix of government and corporate bond funds.”

Combining annuities and deductions in a blended fashion would give you the best of both worlds, says Andrew Tully, technical director of Canada Life. “Done effectively, this approach should make sure you don’t run out of money too soon, while also avoiding being so careful that your money doesn’t grow. “

However, there is no one-size-fits-all approach and your plans will need to evolve as you retire, says Tully. “As inflation climbs, it’s more important than ever to take independent financial advice. “

Updated: November 22, 2021 5:00 a.m.