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Designing DC Menus with Inflation-Hedging Strategies
In 1978, when then-candidate Ronald Reagan likened inflation to a mugger, it struck a nerve. Inflation was running at a 9 percent annual clip, on its way to nearly 15 percent two years later. Inflation was a harsh reality.
Today, inflation is tame, and the voices of monetary hawks have been drowned out. Nonetheless, when it comes to investing for retirement, consultants concur: Inflation is one of the greatest risks, and inflation-fighting assets should be part of retirement portfolios.
Although inflation may seem a distant threat, we believe inflation-fighting assets are critical to defined contribution (DC) plan portfolios because inflation often strikes without warning. Moreover, for retirees who often depend on income that does not adjust with inflation, even relatively tame inflation can be devastating. Consider that after 20 years of 3 percent annual inflation, $50,000 in retirement income would buy only about $27,000 worth of goods and services; with 5 per