How inflation-proof is your retirement income?

RETIREMENT SAVINGS AND OTHER INVESTMENTS Investments in an individual retirement account or 401(k) plan are not adjusted for inflation. They increase or decrease in value as the market rises

and falls, and they protect against higher prices only to the extent that your rate of return matches or exceeds the rate of inflation. However, once you are making withdrawals from the

account, you can adjust the amount you take out to cover the cost of inflation. For example, one common withdrawal strategy recommends taking out 4 percent of your retirement savings in the

first year of retirement and adjusting for inflation in subsequent years. So, if 4 percent of your retirement savings is $20,000 and inflation is running at 3 percent, you would make your

next withdrawal $20,600 ($600 being 3 percent of $20,000). In effect, Chen says, you can use your retirement account to “give yourself that COLA.” This approach does carry some major risks.

One is that you could “draw down too fast and run out of money,” Chen says. Another is that bigger withdrawals can hurt you when the market is down, locking in losses when stock prices are

low and reducing how much you can recover when they rebound. Some investment funds feature stocks that pay dividends. These can provide a predictable stream of income and “help mitigate some

of the losses” from inflation, says Dan Cronin, founder and wealth adviser for Lifestyle Wealth Management in Kailua, Hawaii. There are also investments designed with inflation in mind. The

interest rate on I Bonds, issued by the U.S. Department of the Treasury, is adjusted twice a year to reflect changes in consumer prices. With another federal investment product, Treasury

Inflation-Protected Securities (TIPS), the principal can rise with inflation, meaning interest payments can grow, too. PENSIONS While traditional workplace pensions have declined

considerably as a source of retirement income in recent decades, 30 percent of older adults have one, according to U.S. Census Bureau data. Whether a pension payout accounts for inflation

depends upon the organization that provides it. Pensions from private companies typically do not have a COLA, says Craig Copeland, director of wealth benefits research for the Employee

Benefit Research Institute. Many public-sector pensions do, he says, but the adjustment is often capped at a specific level.