Inflation and investing for retirement

Inflation – a powerful measurement of our purchasing power — has re-entered our lives at levels not seen since the early 1980s. We see clear evidence at the gas pump and the grocery store.

But what does it mean for our investments, and specifically, our retirement plan investments? Here are some reminders based on input from the Washington State Investment Board (WSIB), which is responsible for investing retirement funds that DRS ultimately pays to retirees:

  • How is inflation measured? The most common metric for measuring inflation is the Consumer Price Index (CPI). As of March 31, inflation is up 8.5% compared to a year ago. This means that $100 of goods purchased last March would cost $108.50 today.
  • How do investment managers view inflation? The investment managers who operate in our retirement plans take a long-term view; they look at inflation in context with many other economic and market factors. They anticipate a variation in inflation over time, rather than expecting inflation to remain perpetually at historic lows or highs.
  • Does higher inflation influence how the WSIB invests our retirement plans? In general, inflation does not have a direct or immediate impact on how the WSIB invests retirement funds. Inflation alone isn’t necessarily a reliable indicator of how investments will perform in the future. The WSIB employs long-term, highly diversified strategies rather than short-term tactics. These long-horizon investment plans and market assumptions include a range of possible inflation possibilities.
  • How should retirement plan participants be thinking about inflation? Over time, inflation acts as a headwind against investment performance. Higher inflation can create a bigger hurdle for reaching a specific financial objective. Diversification of investments can help as a strategic buffer against inflation’s effects. DRS’ Target Date Funds are diversified, and the investment mix adjusts automatically based on estimated retirement date.
  • What factors should investors consider in the face of inflation?
    • Well-diversified portfolios often benefit because inflation affects some investments differently than others.
    • Sudden or reactive efforts to increase performance of investments may result in unwanted risks.
    • Companies hurt by the early onset of inflation often find ways to adapt over time.
    • Increasing contributions to investment savings can help offset the effects of inflation. One strategy is to consider increasing your contributions when you receive a pay raise; many public workers in Washington have access to the Deferred Compensation Program, or DCP, and this may be a good time to consider contributing more.
    • Lengthening an investment time horizon allows investments to have a longer period to generate returns.

Bottom line: A long-term mindset is often beneficial. Our state retirement plans are designed with a degree of inflation assumed as part of the market environment. We know that future inflation is unpredictable. A high degree of diversification means that our retirement plan investments — especially funds that include private market and real estate assets – are built to withstand short-term price pressures.

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