Inflation has skyrocketed since the end of 2021. That’s putting a lot of pressure on consumers – especially those living paycheck to paycheck without drawing on savings.
Rampant inflation has also hurt retirees. Although Social Security has received a generous cost-of-living adjustment through 2022, the recent rate of inflation already makes that increase insufficient.
Not surprisingly, 71% of Americans are concerned about the impact of inflation on their willingness to retire, according to the latest data from Fidelity. If you share these concerns, there’s an important approach to retirement planning that you need to take.
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Invest aggressively for maximum growth
Hopefully, part of your retirement planning involves making regular contributions to an IRA or 401(k) plan. But the money in your retirement account shouldn’t just be in cash. Rather, it should be invested so that it grows into a larger sum over time. In addition, it should be invested aggressively so that it grows fast enough to keep up with or outperform inflation. To that end, stocks are your friend.
Investing in stocks is inherently risky. You never know when the market could crash, sending your portfolio balance on a downward path. But if you want to grow your retirement savings at a rate that outperforms inflation, stocks are the way to go.
This assumes, of course, that retirement is many years away. As that milestone nears, consider switching to safer investments like bonds. But if you’re 10 years or more away from retirement, it pays to invest the majority of your savings in the stock market — and there are several ways to do it.
How to choose the right investments
Handpicking stocks isn’t for everyone. If the idea of building your own stock portfolio makes you nervous, there might be an easier solution — loading broad-market index funds.
Index funds are passively managed funds that aim to match the performance of the benchmark to which they are tied. A S&P500 Index funds, for example, will aim to do as well as the S&P 500 itself.
The great thing about index funds is that they take the guesswork out of investing — and they can be a much less stressful way to build a portfolio. They also offer instant diversification, which is an important thing.
On the other hand, if you’re comfortable with the idea of picking your own stocks, you might be able to outperform the broader market — something that index funds alone can’t allow you to do. To do this, you don’t have to overdo it and buy shares in 57 different companies. But you should The goal is to own 15 or more stocks across a range of market sectors.
What specific stocks should you focus on? That depends on your strategy. Some investors look for stocks that offer a lot of value relative to their share price. Others focus on those with the greatest potential for growth. It’s not a bad idea to incorporate both strategies into your plans.
Don’t let inflation ruin your retirement years
The cost of living tends to increase over time, so it’s important to invest your savings in a way that gives you plenty of purchasing power when you retire. Investing money in stocks is a great bet in this regard, whether you do it by investing in index funds, individual company stocks, or a combination of both.
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