How to Prepare for Inflation in Retirement

Senior couple looking at financial paperwork

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Here are three steps to help you prepare for inflation in retirement.


Key points

  • Inflation rose 7% last year, the highest since June 1982.
  • One of the biggest risks retirees face is the risk of inflation.
  • Investors can choose investments that increase with inflation and regularly review their financial plans.

Inflation has been called the “cruelest tax” because it means retirees pay more than they used to for the same goods and services. Inflation rose 7% in the 12 months to December 2021, hitting a 40-year high. If a retiree’s savings account gained 4% during that period, this means that they are, in fact, 3% poorer.

Rapidly rising inflation makes it hard for retirees on fixed incomes to pay the bills. But if you make the right financial decisions, you can make your money last longer. Here are three tips to prepare for inflation in retirement.

Factor Inflation into Your Retirement Plan

Make sure your financial plan takes into account the impact of inflation. Inflation increases expenses such as medical care, food, and housing. If you think high inflation will continue, review your inflation assumptions, update your financial plan, and monitor it regularly.

Social Security increased the cost of living adjustment (COLA) by 5.9% in 2022, the highest in 40 years. More than 64 million Americans saw a change in benefit payments. While the annual COLA helps benefit recipients keep up with the rising cost of living, it’s often not enough.

A comprehensive financial plan can help ensure that you adjust your spending, investment portfolio, and financial goals to keep up with the rising costs of retirement. Those nearing retirement may need to adjust their goals or increase the amount they save and stick to their long-term plan.

Diversify your investment assets

Choose investments that keep up with or even beat inflation. Stocks, gold, and real estate are assets that can help protect against inflation. Real Estate Investment Trusts (REITs) are a great way to invest in real estate without having to buy the property outright. Most REITs also pay dividends, so they can generate income.

Treasury Inflation-Protected Securities (TIPS) are low-risk, government-backed securities that base their yield on inflation. The interest is exempt from state and local taxes, and the interest is paid every six months. The US government also offers low-risk I bonds to help protect savings from inflation. An I bond is a savings bond that earns a fixed rate of interest, plus an inflation rate that is set twice a year. The combined rate of the I bonds issued from November 2021 to April 2022 is 7.12%.

Retirees should maintain a diversified portfolio that contains investments considered inflation-safe. The average retiree will spend up to 30 years in retirement. When looking at a portfolio from a long-term perspective, it’s important for retirees to keep in mind that there will be periods of high and low inflation.

Keep a long-term perspective

It’s also important not to make drastic changes based on current inflation. While investors should brace for moderate to high inflation in the coming years, many experts believe that inflation will eventually return to normal. According to the Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, economists expect the CPI over the next 10 years to average 2.55% per year.

The key is not to let short-term market movements dictate long-term financial plans. While diversifying a retirement portfolio can help avoid inflation risk, taking on too much risk can expose investors to losses from which they may not be able to recover. If possible, defer purchases that are affected by temporary price increases.

Investors cannot prevent inflation, but by preparing for it, they can reduce its impact. There is no perfect hedge against inflation, so it is important to be consistent and take a long-term perspective. By regularly reviewing financial plans and investment portfolios, retirees can manage them in real time and make changes as needed.

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