3 Ways to Fight Inflation and Win the Long Game | Personal finance







Although inflation can negatively affect your purchasing power, there are ways to deal with inflation that are consistent with the best strategies for managing your money in general.

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Inflation is scary. Groceries, gas, plane tickets, car purchases, utilities: In so many areas, your purchasing power decreases as prices continue to rise.

Fear can make you want to do something – anything! – to fight back. Fortunately, many of the best anti-inflation moves align beautifully with proven money management practices. Here are three areas where smart strategies become even smarter when prices rise.

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Invest with the long term in mind

Advice on “inflation proofing” your investments often mentions gold, commodities and real estate. If you already have a well-diversified portfolio, however, be careful with short-term strategies that can backfire, says Michelle Gessner, a certified financial planner in Houston.

“Your best bet is stocks,” says Gessner. “Investing in stocks is one of the best hedges against inflation there is.”

Gold has not been a reliable inflation hedge since the 1970s, Gessner notes. Commodities – staples such as agricultural products, fuel and metals – can be profitable when inflation rises, but long-term returns have been disappointing. For the 20-year period ending April 29, for example, the S&P 500 stock index more than tripled, while the Bloomberg Commodity Index rose about 30%.

Real estate has a better track record, both in periods of inflation and in the longer term. But owning real estate outright can be difficult, which is why many financial planners recommend mutual funds, exchange-traded funds, or real estate investment trusts that invest in office buildings, apartments, hotels, shopping centers, and other commercial real estate.

But even there, people should not go overboard, says Gessner. She recommends that her clients invest 3% to 4% of their portfolios in real estate.

“Everything in moderation,” says Gessner. “More is not necessarily better.”


Good inflation news: The prices of online shopping are suddenly falling rapidly

Pay off debt the smart way

Inflation can be good for people with fixed-rate debt such as mortgages, car loans, or federal student loans. As inflation erodes a dollar’s purchasing power, borrowers are able to repay debt with cheaper money than what they borrowed.

Even without inflation, financial planners say most people have better uses for their money than prepaying debt with low, fixed interest rates. Only after you have maxed out your retirement savings, built up an emergency fund and paid off all other higher-interest debt should you consider making extra payments of e.g. a mortgage loan.

“Having a 3% mortgage isn’t so bad if you can take that money and do something better with it,” says Gessner.

Consider targeting any credit card or other variable-rate debt, as it is likely to become more expensive as the Federal Reserve raises interest rates to combat inflation. If you can’t pay off this debt quickly, try fixing the rate. You may be able to use a personal loan to pay off credit cards, for example, if you have good credit. If you’re struggling to pay off your debt, a nonprofit credit counselor can help review your budget and discuss options. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org.

Delayed Social Security

One of the best inflation hedges retirees can have is a maximum Social Security benefit, says William Reichenstein, director of research for Social Security Solutions, a claims strategy website. Social Security benefits are adjusted annually for inflation, so the higher a person’s benefit, the more money they get from each annual cost-of-living adjustment.

The Social Security Administration increased this year’s benefits by 5.9%. The Senior Citizens League, an advocacy group for older Americans, predicted an 8.6% increase in benefits next year.

People can start Social Security as early as age 62, but their benefits are permanently reduced if they apply before their full retirement age, which is currently 66 to 67. After full retirement age, people who delay their applications get an 8% annual boost in their benefit, known as a delayed pension credit. Benefits max out at age 70.

Your benefit gets cost-of-living increases whether you’ve started receiving it or not, so you don’t miss out on inflation adjustments when you delay your application, Reichenstein says.

Most people who reach retirement age will live past the “break even” point, where the larger benefit they get from delaying exceeds the smaller checks they miss in the meantime, Reichenstein says. It is especially important for the higher income of a married couple to delay as long as possible. The larger of a couple’s two benefits is what the survivor receives when the first spouse dies.

Also, delaying Social Security benefits can help middle-income earners reduce their overall tax burden, leaving them with more after-tax money to spend, Reichenstein adds.

The way Social Security benefits are taxed creates a “tax torpedo” — a sharp increase and then a decrease in the marginal tax rates many retirees pay on their income. (A marginal tax rate is the amount of extra tax paid for each additional dollar of income.) Delaying Social Security and tapping retirement funds instead could reduce the effects of this torpedo for middle-income earners, who would otherwise see their marginal tax rates double, Reichenstein says.

“Goods and services are bought with after-tax dollars, not pre-tax dollars, so that’s another reason to consider delaying a Social Security benefit,” he says.

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This article was written by NerdWallet and was originally published by The Associated Press.

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