U.S. GDP, the Economic Recovery and Your Retirement Portfolio

Every quarter, the U.S. Bureau of Economic Analysis (BEA) releases a revised Gross Domestic Product (GDP) figure for the previous three months. On July 30, the Commerce Department will release figures for the second quarter of 2014, which comprises the three months from April to June.

The current forecast is for 3.2% GDP growth, up significantly from a -2.9% reading during the first quarter of 2014, according to a report released by the BEA. GDP is defined by Investopedia as “the monetary value all the finished goods and services produced by labor and property located in the United States,” so a difference of a just a few percentage points can make a big difference when total real GDP is measured in the trillions of dollars.

If the 3.2% forecast is correct, then it’s a potentially good sign for the economic recovery. (Business Insider breaks down what the GDP figure might really mean.) It is certainly a much better sign than a second consecutive quarter of negative GDP growth. But there are also risks that investors should be aware of.

Recognizing that one quarter does not make a trend and the likelihood of sustained GDP growth of greater than 3% over the short term is doubtful, a growing economy generally indicates that consumers are more willing to go out and spend, whether that means finally buying a new house, upgrading their TV or remodeling their kitchen. To meet this increased demand, construction and electronics companies will have to hire more employees and order more materials. These increased costs often get passed down to customers in the form of higher prices, which is a tell-tale sign of inflation.

The current inflation rate in the United States — as recorded in June of 2014 — is 2.1%, the highest it has been since late 2012. If the GDP figures hold true, this rate may push even higher, though the Federal Reserve stands ready to use the tools at their disposal to combat inflationary pressures on the U.S. economy.

The most important thing to remember about the effects of inflation is that every one of your dollars will buy a smaller amount of the goods and services that you need. Therefore, retirees no longer drawing a salary with regular raises will see expenses rise. They might see their savings evaporate more quickly than they anticipated, and run the risk of having less money to fund their retirement several years down the road.

To offset rising costs, investors should carefully consider ways to either supplement their income or reduce their expenses or both. They should consider keeping at least part of their retirement assets in investments that have at least the potential to outpace the rate of inflation. A financial advisor can help walk you through your options, assess your retirement portfolio and, if need be, rebalance your budget.

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