The tricky thing about inflation is that it is sneaky. A bank or brokerage statement shows you how much you have in assets, but it doesn’t tell you what you can buy with that money. Our retiree may think that he still has his $1,000,000 as he ages, without realizing that the value of that money is declining. And not only is the value declining, but the amount of income it generates is also declining in inflation adjusted dollars. If inflation is not countered our investor may find himself in the situation above, with not enough income to support his spending needs.
Bottom line: Bonds can play an important role in providing income during retirement, but may not provide a significant source of portfolio growth. This means that if you still need to build that nest egg in retirement, consider blending bonds with other asset classes that have higher expected returns. And above all, don’t forget about inflation. If you are not earning the inflation rate, your portfolio is actually declining in value.
Matthew Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.