6 Tips to Shield Your Retirement Against Inflation

By Matt Stephens, CFP®

There’s no denying that inflation is impacting our everyday lives, from buying groceries to paying the electric bill to filling up on gas. But did you know that inflation can also impact your retirement savings? A dollar today won’t be worth the same as a dollar when you retire, so it’s important to shield your retirement income from inflation.

Below are six steps you can take to combat inflation and safeguard your retirement savings for years to come.

Why Is Inflation a Threat?

Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired. 

The Consumer Price Index (CPI), which is a common measure of inflation, reached 9.1% in June 2022, the highest it’s been in 41 years. Though it has slowed slightly in recent months (reaching 8.5% and 8.3% in July and August), it is significantly higher than the Fed’s target rate of 2% per year.

As the cost of goods rises, many retirees are left with a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.

What Can You Do to Safeguard Your Savings?

Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.

1. Reassess Your Budget

The unfortunate fact is that most people have unlimited wants, but limited resources. Inflation exacerbates this issue by making every dollar you spend worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.

For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan. 

Reassessing your budget is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run. 

If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is always a good idea.

2. Borrow Sooner Rather Than Later (Or Not At All)

It's better to pay cash for large purchases if you can, especially now that interest rates have risen so much. But, if you have to take out a loan during a high-inflation environment, inflation actually helps borrowers to a degree. Because it causes the value of your money to decline over time, funds borrowed today will be paid back with money that is worth less than it was when it was originally borrowed.

Again, this isn’t to say you should start excessively borrowing money for things you don’t need. But, if you know you have a large purchase coming up, like buying a new home or vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.

3. Consider TIPS

A way to help overcome inflation in your bond portfolio is to use Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds that adjust periodically to account for inflation. Like all U.S. Treasury bonds, they will not earn the highest rate of return, but your purchasing power will remain intact, and the risk of default is the lowest of all investments due to backing by the government. An alternative to TIPS that became popular in 2022 is Series I savings bonds. These tend to have a higher yield, but have a $10,000 per year purchase limit and have to be bought directly through a government website. 

4. Find a Fun Part-Time Job

Most retirees rely on Social Security and sometimes a pension to fund their lifestyles. If your expenses are greater than these income sources, you'll need to supplement with income from your investment assets. An effective way to avoid or reduce portfolio withdrawals is to simply add more income. You'll need something to do in retirement and I've seen several clients get fun part-time jobs at places like golf courses or pottery shops. This provides plenty of needed social interaction as well as extra money. 

Not only will this extra income improve your portfolio longevity (since you won't have to withdraw as much each month), but it will also help minimize the impact of inflation.

5. Consider Real Estate Investments

Alternative investments are another option in the fight against inflation. These are assets that don't fit neatly into the stock or bond categories, but have some characteristics of both, like real estate. They usually perform differently, which can potentially smooth portfolio volatility. Real estate in particular tends to perform well during periods of higher inflation. But, a major downside is a lack of liquidity (or the ability to sell quickly). Individual pieces of real estate like a house, raw land, or a commercial building can take a lot of money to buy and maintain. Real Estate Investment Trusts (REITs) provide a way to pool your money with other investors to own a small piece of a larger property and share in the profits (or losses). These can be a nice addition to an investment portfolio, but tend to be complex and difficult to pull money out of when you need it. 

6. Put Idle Cash to Work

You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation will eat away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate. 

The average high-yield savings account rate is around 3.5% APY as of February 2023. While this is still a far cry from the 8%+ inflation rate, it is much better than the 0.1% interest many are still earning in regular savings accounts around the country. 

Other options that can improve your interest rate include money market funds, CDs, and short-term Treasury bills. No matter which option you choose, just make sure you get it out of that low-yielding bank account.

Are You Protecting Your Retirement Income From Inflation?

When it comes to proper retirement planning, there’s a lot to think about. At AdvicePoint, we specialize in simplifying retirement planning and helping our clients reduce their taxes, invest for income, and find clarity. We’ve helped clients just like you retire comfortably and feel confident about their future.

If you need help or have questions about anything in this article, schedule a 30-minute call today.

About Matt

Matt Stephens is a financial advisor with AdvicePoint, a financial services firm based in Wilmington, North Carolina, specializing in retirement income planning, tax-reduction strategies, and charitable planning. Matt spends his days guiding clients as they make the leap from career to retirement. He loves simplifying complex financial issues and giving unbiased answers in plain English. His team goes beyond just professional investment management with their client-focused and high-touch approach, building plans as unique as each client. 

Matt obtained degrees in business administration and communication studies from UNC-Wilmington, holds the Series 66 Investment Advisor and Insurance Licenses, Chartered Retirement Planning Counselor^SM, CERTIFIED FINANCIAL PLANNER^TM, and Behavioral Financial Advisor^TM certifications, and was a recipient of the 2019 Wealth Management Thrive Award. Outside of work, Matt enjoys spending time with his wife, Brooke, and their two young children. They attend Port City Community Church, where Matt has volunteered since 1999. His favorite pastime is surfing. To learn more about Matt, connect with him on LinkedIn.