5 Inflation-Beating Investments for Retirement

One of the greatest dangers to any retirement plan is that insidious erosion of purchasing power commonly known as "inflation."

A weekly trip to the gas station or supermarket is enough to drive home the point. While younger, working Americans have opportunities -- often through increased earning power -- to overcome inflation, those in retirement or close to it are particularly vulnerable.

Inflation-Beating Investments

1. Treasury-Inflation Protected Securities

How they work: TIPS protect against inflation through their connection to the Consumer Price Index. Specifically, TIPS' principal rises with inflation and falls during deflation. If someone buys $100,000 in TIPS and inflation increases by 3 percent, the TIPS principal will be worth $103,000 by the end of the year.

2. I Bonds

How they work: I bonds are designed to keep pace with rising prices by paying a composite interest rate that's made up of two parts: an underlying fixed rate and an inflation-adjusted variable rate. The variable interest portion is tied to the CPI rate and rises and falls during the life of the bond to keep pace with prices.

3. Dividend-Rich Stocks

How they work: As a rule, public companies either reinvest earnings or pass them along to shareholders as dividends. For beating inflation, the second variety is hard to beat: Dividend-rich stocks provide income, but unlike fixed-income investments, they have the potential for capital growth as well.

4. Exchange-traded funds, or ETFs

How they work: ETFs have qualities of both stocks and funds. Though they comprise a basket of securities, they're traded like a stock, so prices vary throughout the day. But like mutual funds, ETFs can be include equities, bonds, commodities, currencies, derivatives, etc. ETFs are generally designed to mirror indexes, but that's not always so.

5. Mutual Funds

How they work: Funds can be made up of a variety of underlying assets including stocks, fixed income, currencies, commodities and cash as well as a combination of these, depending on the style you choose.

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