With inflation up, be careful with savings - East Valley Tribune: Business

With inflation up, be careful with savings

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Posted: Sunday, August 6, 2006 7:29 am | Updated: 5:09 pm, Fri Oct 7, 2011.

NEW YORK - Several recent government reports indicate that inflation is heating up. What can consumers do to protect their savings — and preserve their buying power?

‘‘The latest inflation numbers are a bit of a wake-up call to look at your spending, your saving and your investment strategy,’’ said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Fla. ‘‘Inflation isn’t something to ignore.’’

Inflation — basically a measure of rising prices — means people need to spend more to buy the same amount of goods and services. As inflation increases, consumers need to take a hard look at how they’re allocating their budget dollars. They also should review their saving and investment accounts to make sure their returns are at least keeping pace with inflation.

Earlier this week, a government inflation gauge tied to personal spending rose 0.2 percent in June, excluding food and energy. Over the past year, this measure of ‘‘core’’ inflation is up by 2.4 percent.

That may not sound like much, but financial planner John Nersesian, managing director of wealth management services with Nuveen Investments in Chicago, points out that ‘‘small numbers can have a big impact.’’

Take the case, for example, of a person who is retiring today who plans to spend $100,000 a year in retirement. If inflation is 2 percent a year, in 20 years that retiree will need $164,000 to cover the same expenses, Nersesian said. If prices go up 4 percent a year, the total that is needed increases to $230,000, he said.

‘‘The lesson,’’ he said, ‘‘is that investors need to protect themselves against inflation because it can have a devastating impact on their financial futures.’’

One way consumers can try to counter inflation is to broaden the assets they invest in, he said.

‘‘Fixed-income investments such as bonds are particularly vulnerable during periods of high inflation,’’ he said. Instead, investors should consider putting more of their money into high-yield online savings accounts or shortterm certificates of deposit as well as diversifying into alternatives such as real estate investment trusts.

‘‘Hard assets like real estate, commodities, gold and other precious metals — or stocks and mutual funds that invest in those assets — typically do well in times of rising inflation,’’ Nersesian said.

James Swanson, chief investment strategist with MFS Investment Management in Boston, said another alternative is to invest in inflationlinked bonds, such as Treasury Inflation-Protected Securities, or TIPS. These bonds, in maturities of 5 years, 10 years or 15 years, can be purchased at the Treasury’s Web site, www.treasurydirect.gov, as well as through banks and brokers. They’re set up so that the principal increases as the Consumer Price Index goes up.

‘‘They’re guaranteed to beat inflation, and they’re very tradable,’’ Swanson said.

A number of mutual funds that invest in TIPS also are available, he said.

Another inflation-linked investment for small savers is the I-Bond, a U.S. savings bond available in denominations as low as $50. These bonds have a fixed rate of interest as well as an adjustable component that resets twice a year to reflect the change in the Consumer Price Index.

The flip side to the pain of inflation is that it’s generally accompanied by rising interest rates — not exactly bad news for savers.

‘‘It’s one reason you can get 4.5 percent to 5 percent on a savings account right now,’’ Swanson pointed out.

Bankrate.com’s McBride noted that inflation was subdued for a number of years before it began rising in the last year along with prices for oil and other commodities.

Inflation is one reason consumers have been ‘‘throttling back’’ on purchases, as seen in slower consumer spending nationwide in the second quarter as well as subdued retail sales. ‘‘Prices are rising, so people have to stretch those dollars further,’’ McBride said.

‘‘As to savings, the idea here isn’t that you’re going to alter your investment strategy every time the wind changes,’’ McBride said. ‘‘But an effective strategy requires a checkup from time to time, and inflation is a reminder of that need.’’

This is especially true for older savers, he added.

‘‘A 65-year-old retiree needs to preserve buying power over the next 30 years, so inflation has to be issue No. 1,’’ he said.

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