facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

Blog: Why Social Security Could Be the Answer to Your Inflation Concerns

Chances are, the things you bought as a kid probably cost a whole lot more these days. That’s thanks to this little thing called inflation.


Inflation is a big concern for a lot of people, especially those who are close to hitting retirement. After all, if the things that you buy today are going to cost even more in the future, how will your dollars keep up?


In our search for the answer to this question, we came across an insightful article on inflation titled Stocks and Bonds Haven’t Helped Against Inflation by Derek Horstmeyer. This piece explores the effectiveness of common strategies that are used to mitigate the impact of inflation.


These popular strategies typically include investing in precious metals like gold and silver, oil, stocks, or real estate, with the belief that these investments will also rise with inflation.


According to the numbers, how effective are these strategies? Read on to find out!



The Correlation Coefficient


To calculate just how connected these investments are to inflation, Derek ran the numbers to find the correlation coefficient for each.


If a correlation coefficient is 1.0, that means that those two things are perfectly correlated and will go up perfectly in line with one another. On the other hand, if the correlation coefficient is zero, that means that those two things have no connection to each other. And if the correlation coefficient is negative, then when one goes up, the other goes down.



The Results


According to this, Derek found that, ultimately, there isn’t a big connection between the price of these different investments and inflation.


While the investments that had the highest connection to inflation were gold and oil, the correlation coefficient for these types of investments is only 0.35, which is not very high at all.


So, when people feel like they need gold and oil in their investment portfolio because they believe those investments will go up with inflation, they aren’t necessarily right. Gold and oil won’t rise perfectly alongside inflation, and it will instead rise at a much lower rate. When Derk ran the numbers he shows that you can only hedge against 12% of inflation’s movements with gold and oil — that’s really not much at all!


As for real estate, the correlation was 0.25. While this is a little less connected than gold and oil, we see real estate in a more favorable light since this is a type of investment where you are actually buying something tangible.


However, at the end of the day, these common methods of hedging inflation give only 10 to 12% protection against inflation — leave you 90% unprotected against inflation.



Other Problems With These Investments


The correlation coefficient isn’t the only issue with these investments.


Consider for a moment about what happens when you own a company. If you own stocks, there’s cash flow, profits, dividends, and actual money that’s created from the stock you own. With gold, silver, and other precious metals, there is practically no value other than what you can sell it at to the next person. There are no dividends, no cash flow — and there are a lot of big costs in trading them.


Furthermore, when you buy oil, oftentimes, you’re not actually buying oil. If you want to buy oil, you usually buy an exchange-traded fund, which means that you’re buying a financial contract, not oil. After all, it’s not like that ETF actually holds oil. Instead, what they’re holding is a bunch of bonds and futures, which are investment contracts saying that they are going to pay you money if the price of oil goes up or down. 


According to Derek, the correlation coefficient between bonds and inflation is actually negative, meaning that when one goes up, the other goes down. So if you’re buying an oil ETF that’s full of bonds, expecting it to rise with inflation, you might actually be shooting yourself in the foot rather than protecting yourself against inflation.


On the other hand, many people believe that real estate is a good hedge for inflation. Why? Because if you own an apartment building and have rent coming in, you are bringing in money and can increase the price of your rent to keep up inflation.


However, the issue is that a lot of the time, when you own an apartment building, you also have a mortgage — which is not the mortgage that you’re used to with your own house. A lot of these mortgages include rates that reset every five or so years. So, even though you could try and raise rent to keep up with inflation, every five years, your mortgage will reset, and if inflation went up enough for you to raise rent it probably went up enough for your mortgage interest rate to go up, too. 



One Solution: Social Security


One thing that we believe could be the answer to your inflation concerns is your social security.


While most of the time your pension doesn’t go up with inflation, your social security does.


Many people don’t realize that social security has a cost of living adjustment based on inflation measures called CPI (Consumer Price Index). When the CPI goes up by a couple percent, social security also goes up a couple percent — this way, when inflation increases, so does the amount of money you’re getting every single month.


The longer you live, the bigger problem inflation is. However, social security is going to be around for the rest of your life. So the longer you live, the more you get from social security. With it, you don’t have the worry about the price of gold going up and down and you don’t have to worry about the mortgage on your real estate.


Even if your real estate, oil, and stocks make you more money, remember that if inflation goes up, so will your taxes. But with social security, at least 15% of it is tax free. With social security, between 0 to 85% of it is taxable, which means at least 15% of it is tax-free money — sometimes even more, depending on your situation.


That’s why we think that if you’re trying to find a way to fight inflation, then finding ways to increase your social security is a great way to go.




Increasing Your Social Security


The longer you delay taking your social security, the more you will get in benefits. 


So, if you’re really worried about inflation, you can draw down on your bonds while increasing your social security. This means that you can live off your bonds for as many years as you want, which have a bad connection to inflation, and then when you do turn on that social security, you will have more of an income that has a great connection to inflation.


We have a lot of content available to help you learn more about maximizing your social security — if you want to learn more, click here


We want you to make the right decisions when it comes to retirement. If you’re worried about inflation, please remember that the math shows that investments like gold, oil, silver, real estate, stocks, and bonds are not necessarily a great protection against inflation. 


However, the math also shows that social security is just about the best way you can protect yourself against inflation. So if you’re concerned about inflation, we recommend finding some ways to increase your social security amount.


If you have questions, or would like help maximizing your social security or your protections against inflation, please don’t hesitate to contact us.


Thrivent and its financial professionals do not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.