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How can I help my IRA beat inflation?
Q: I'm age 77 and want to roll my husband's IRA from his place of employment to something else -- but what? I'm not keeping up with inflation where it is now.
A: From your description, it is likely that this IRA currently is invested for safety and income, which is a stable approach but one that is going to have trouble keeping up with inflation. According to the Bureau of Labor Statistics, inflation is running at about 2 percent a year these days. In contrast, the FDIC reports that the average interest rate on savings accounts is just 0.06 percent. Money market rates are barely better, at an average of 0.09 percent, and even five-year CD rates are below 1 percent.
The situation may be helped a bit when you transfer the IRA away from your husband's employer. Employer-sponsored plans often carry the burden of administrative fees that would not be necessary if you set up an IRA rollover at a bank. This would also give you the latitude to shop around for the best bank rates, which are considerably higher than the national averages. You could also boost your income yield by investing in longer-term bonds, but those can be especially vulnerable if inflation starts to rise.
If beating inflation is a high priority, you should at least consider having a growth component in your portfolio, such as stocks. This would improve your chances of beating inflation, but it would also expose you to the ups and downs of the stock market. At your age, moving this IRA heavily into stocks would probably not make sense unless you have considerable income from other investments or other sources. However, a partial allocation into stocks or a move into a fairly conservative balanced account might give you an inflation-fighting component without too much volatility.
The trade-off between stability and fighting inflation really comes down to your time frame. If you plan on drawing heavily from this IRA over the next few years, then you should err on the side of stability because there would just be too much risk of the money not being available when you need it if you get too aggressive. However, if you don't plan to draw heavily from this money right away and are depending on it more for the long term, introducing a growth component would make more sense since the effects of inflation are especially damaging over the long term.
Finally, this question of drawing on this money has little to do with the mandatory distributions you may be required to take from the IRA, since you can always roll those distributions into similar, after-tax investments if you don't plan to spend them right away.
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