Retirement Income Challenges in an Inflationary Environment | ETF Trends

The Federal Reserve has ramped up its fight against inflation through more aggressive interest rate hikes and quantitative tightening, but in an environment of soaring inflation that continues to linger, consumers and investors are feeling the pinch. For those individuals living off retirement income, it’s being felt particularly keenly as inflation erodes purchasing power.

In this environment of continued inflation, consumers and investors are seeing their purchasing power erode at a fairly rapid pace. One way to look at it is through very quick, macro-level calculations using the rule of 72 that is typically used for investment returns to determine how long it would take an investment to double. This rule of thumb works with investments by dividing the number 72 by whatever the yield of a fund is; a fund that yields 3% annually would double in 24 years.

It can be used in reverse to calculate how long it could take for inflation to halve the value an individual’s savings. The most recent inflation reading of 8.6 would see consumers’ savings halved in approximately eight years and three months.

It’s a very rough way to demonstrate the way that consumers and investors are feeling their purchasing power erode, but it can help to paint a clearer picture for some. The rule of 72 doesn’t take into account things like the variations of personal inflation, and it also only works by assuming that inflation will remain constant.

The Fed has committed to driving down inflation at whatever the cost, including recession, and with rapidly rising interest rates, elements of inflation are likely to begin easing in the near future. There is a larger concern that some of the inflationary pressures are simply outside of the arena of the Fed’s ability to affect, such as the war in Ukraine’s impact to commodities, global supply chain issues, and more.

For now, inflation remains, and its impacts to portfolios and particularly retirement income are very real.

“It’s important to understand that the effects can be stealth. Inflation affects our purchasing power,” Marguerita Cheng, CEO of Blue Ocean Global Wealth, told Yahoo Finance. “The solution is to include equities in your investment mix.”

Equities can help by offering higher rates of return potential than other investment options, particularly when looking long-term for investments that can grow with the retiree over time.

Nationwide offers a suite of actively managed ETFs within equities for financial advisors. These funds include the Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), the Nationwide S&P 500 Risk-Managed Income ETF (NSPI), the Nationwide Dow Jones Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000 Risk-Managed Income ETF (NTKI).

For more news, information, and strategy, visit the Retirement Income Channel.