Brett Arends’s ROI: More than 70% of savers are worried that inflation will affect their ability to retire

Some 71% of retirement savers tell Fidelity Investments that they are worried about how inflation will affect their savings and their ability to retire. And, maybe more ominously, about a third—31% — say they don’t know how to make sure their savings keep up.

The results come in the new 2022 State of Retirement Planning report from the fund management and 401(k) giant.

Among the other alarming news in the survey: 21% of younger savers, meaning those aged 18 to 35, told Fidelity they cashed out their 401(k)s last year when they quit their job. Ergh. And 45% of those younger people say there’s no point saving for retirement until “things get back to normal.” Memo to you kids: Things never “get back to normal.” No such place. There’s always something.

Back to inflation: So far the headlines have outstripped the actual numbers. For example, although the current rate is high, the bond market is still predicting the official inflation rate to come tumbling back down pretty quickly. The five-year forecast is 3.4% — less than half the current inflation rate.

But investors are right to be worried about inflation, for two good reasons.

The first is that the official inflation rate may be a bit hinky. While the overall official rate is 7.9%, the government’s own data show double-digit rises in the past year in meat, poultry, fish, eggs and milk, fresh fruit and vegetables, and things like cars and major household appliances. Oh and of course anything related to energy. Gasoline prices have risen nearly 40%.

OK, so the prices of other things have risen by much less than the overall inflation rate. Among them, apparently, are booze, medical expenses and tuition. But the main thing keeping the official inflation rate down to just 7.9% is that more than half the entire calculation is based on the cost of housing, and the government number-crunchers think those costs have risen by just 4.5% a year in the past 12 months.

Hmmmm. We’ve written about this before. Make up your own mind.

Meanwhile the second reason inflation is such a worry is that for most people it is an uninsured risk. Or, in the parlance of Wall Street, they have an “unhedged” exposure. Retirement portfolios consist of stocks and bonds. The theory is that supposedly one will do well when the other does badly. But during periods of high inflation both can do badly at the same time. Very badly indeed, as anyone who remembers the high-inflation 1970s will recall.

From 1967 to 1981, an investment in the S&P 500 had lost almost a quarter of its purchasing power and investments in 10-year U.S. Treasury bonds had lost a third. It’s hard to overstate the financial damage that caused. Savers didn’t just lose money in real terms: They also lost time. Someone expecting an average stock market return of 5% a year above inflation would have expected to double their money, in real, purchasing-power terms, during those 14 years. So they ended up with barely a third of what they had expected.

And this was the damage felt by someone who wasn’t actually retired, and who was able to leave their investments in place. Someone who was living off their savings, and drawing them down each year, was in deep trouble.

Ordinarily this is where TIPS bonds, or Treasury inflation-protected securities, are supposed to come in. But they have become so expensive that one can hardly call them inflation-protected. Most are guaranteed to pay less than the (official) inflation rate, year after year. Only those lasting nearly 30 years are even guaranteed to keep up with (official) consumer prices.

What does better during periods of high inflation? Well, we don’t know for sure because each time is different. Gold SGOL, -0.86% was a standout in the 1970s, but it had only just been privatized after 40 years under strict government control. The same isn’t true today.

Gold has been a currency for thousands of years, but our economic conditions are totally different. Imagine a Chinese merchant in AD 1000 trading with people along the vast length of the silk road to Istanbul. How could he check anyone’s credit rating? A common currency in the form of gold worked wonders. Today he’d just go online.

Other assets hedged against inflation may include land and real estate—which may simply mean REITs for most investors, as well as your home—and the stocks of companies that produce natural resources such as oil and gas, iron, coal, copper and so on.

Funds that invest in resource stocks include SPDR S&P North American Natural Resources ETF NANR, -0.36% and SPDR S&P Global Natural Resources ETF GNR, +1.26%. Those that focus solely on energy stocks include some very low-cost options, such as Fidelity MSCI Energy Index ETF FENY, -0.07%, Energy Select Sector SPDR Fund XLE, -0.09%, and Vanguard Energy ETF VDE, -0.02%, which all charge 0.1% a year or less.

Possibly the most hedged investment to inflation, if the most controversial, is that of commodities themselves (through an exchange-traded fund that buys futures contracts). That includes some exposure to gold and silver as well as oil, industrial metals and so on. Available funds include the Invesco DB Commodity Index Tracking Fund DBC, +0.47% and the low-cost iShares Bloomberg Roll Select Commodity Strategy ETF CMDY, -0.71%, whose fees are 0.28% a year.

The issue with commodities is that, like Tabasco, a little goes a long way. They are volatile. They boomed for the first couple of months this year, but have tumbled by more than 10% in the past few days. Oh, and over very long periods they tend to be dismal investments, because they generate no income and have tended to fall in value, at least outside periods of high inflation. Commodities fell by about a third overall last decade, and from peak to trough by about two-thirds.

There are, as ever, no free lunches. Least of all when sandwich fillings are getting so expensive.