How to Protect Savings From Inflation
Since the 1970s, the U.S. money supply has increased annually. Increases in this supply cause inflation. As a result, prices for goods and services, as measured by the Consumer Price Index, rise. If inflation is higher than the yield on your savings, you'll end up losing money. You can protect your savings by investing in funds that either benefit from or are indexed against inflation.
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Instructions
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Balance your portfolio with investment in a mutual fund that allocates funds to inflation-indexed securities. There aren't many funds of this nature. Look for funds with "real return" or "inflation-protected" in the title. Some examples are the Fidelity Inflation-Protected Bond Fund (FINPX) and the Vanguard Inflation-Protected Securities (VIPSX).
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Buy individual inflation-indexed securities, commonly known as "TIPS." TIPS are guaranteed to give a real rate of return. They are adjusted against inflation every 6 months. You can purchase TIPS from the government through the TreasuryDirect program. Auctions are held each year in January, July and October.
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Purchase I bonds, which are inflation-adjusted savings bonds. Adjustments for inflation are made in May and November each year. They generally have 30-year maturities and lower interest rates than TIPS.
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Acquire gold and other precious metals. Although prices have fluctuated during periods of inflation, they've maintained or increased their purchasing power.
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Reinvest annual dividend income instead of spending it all. Retirees should limit spending to only 4 to 5 percent of their annual assets.
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Invest in companies that benefit from inflation, such as companies that deal in natural resources like metals, oil or other tangible assets.
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