5 Ways Retirees Can Lower Their Inflation Risk

Man looking at inflation
Photo by Karpova / Shutterstock.com

A long and satisfying retirement tops many people’s life goals. Modern medicine is helping to extend lifespans, but it’s up to you to determine whether you’ll have enough money to comfortably live out those extra years. That means not only saving enough money for retirement, but also protecting your nest egg against inflation once you leave the workforce.

“It’s important for retirees to understand inflation risk because it can dramatically impact their ability to maintain their desired lifestyle throughout retirement,” says Brett Tharp, a Certified Financial Planner who works as a financial planning education consultant at eMoney.

Once you understand inflation risk, you can then implement one or more strategies to avoid having inflation eat away at your retirement savings.

What is inflation risk?

Inflation risk is the danger of your money losing its purchasing power over time. Products become more expensive because of inflation, and you need your money to grow at a similar pace if you want to maintain your lifestyle.

A common measure of inflation is the Consumer Price Index. It uses the prices of consumer goods and services to determine the annual inflation rate. For most of the past decade, inflation has been at or below 2%. At 2% annual inflation, something that costs $1.00 now would cost $1.22 in 10 years, according to New York Life.

Inflation very well may not remain at 2% for the duration of a 20- or 30-year retirement, so retirees should plan for higher rates. While we haven’t seen double-digit inflation since the early 1980s, it’s not unusual to see rates in the range of 3% to 4%.

Those percentages may not seem like a lot, but they can add up. Consider someone who retired in January 2000 and was living comfortably off $50,000 a year. By January 2020, that person would need an annual income of $76,413 to have the same buying power as they did 20 years ago. That’s according to a CPI inflation calculator from the U.S. Bureau of Labor Statistics.

Strategies to minimize inflation risk

You can address inflation risk by using the following strategies.

1. Invest some money more aggressively

One of the best ways to minimize inflation risk is to ensure that at least a portion of your retirement savings is invested in growth funds.

“Retirees should consider keeping a portion of their savings and investments in securities that can outpace inflation to reduce this risk,” Tharp says. “Investments generally need to keep pace or even outpace the rise in cost of the goods and services.”

At the same time, as a retiree, you don’t want too much of your money in higher-risk stocks where you could see a loss should the market go down. A financial planner or adviser can help you determine the right mix of investments based on your age and needs.

2. Keep money in inflation-adjusted accounts

For money not kept in growth stocks and equities, retirees should look for savings and investment vehicles that will keep up with the rate of inflation.

“Inflation risk is also why people shouldn’t typically prioritize cash savings –- it will lose value over time as costs increase,” Tharp says.

Treasury Inflation-Protected Securities, or TIPS, are one investment option designed to keep pace with inflation.

Traditional savings accounts provide little to no interest, but money market accounts and certificates of deposit are other ways to earn interest while avoiding market risk. You can learn more about them in “The 3 Safest Places to Keep Your Emergency Cash.”

3. Purchase an inflation-protected annuity

For peace of mind, you could purchase an inflation-protected annuity. These products provide guaranteed payments that increase each year based on the Consumer Price Index or a fixed percentage. “Annuities sometimes offer ways to help mitigate the risk of losing purchasing power due to inflation, depending on the type of annuity and associated features you choose,” explains Wells Fargo’s annuity sales site.

An annuity can require a significant upfront cost. In exchange for inflation protection, you might receive smaller payments than would be provided by other products. For example, a 65-year-old woman who buys a $100,000 annuity with an immediate payout and no inflation protection could receive approximately $450 a month in income for life, according to Charles Schwab’s annuity income estimator. But an inflation-protected annuity could have payments that, at least initially, are 20%-30% lower.

Some annuities offer variable payouts that can increase each year although these increases are not guaranteed or tied to the inflation rate. With inflation being so low in recent years, these may be another option to consider.

Annuities are complex products and so it is best to consult with a financial professional who is a fiduciary (who is obligated to act in your best interest).

“Annuities often have monster fees, and they’re not always clear. For that reason, avoid buying annuities from commissioned salespeople,” advises Money Talks News founder Stacy Johnson.

4. Lower your cost of living

There are two reasons to avoid inflation risk: to ensure your retirement funds don’t run dry and to maintain your lifestyle. You can address both issues at once by lowering your living expenses.

“A major mistake that people make is minimizing the impact that inflation could have on their ability to stay retired with their desired lifestyle,” Tharp says.

Adjusting your lifestyle doesn’t necessarily mean living on rice and beans or giving up your favorite activities. It could mean moving to a more affordable community. Or downsizing to a smaller home and eliminating expenses — a second vehicle, for example — that are no longer needed now that you aren’t working.

5. Delay Social Security benefits

Unless you have reason to believe you won’t live long in retirement, delaying Social Security payments can help beat inflation. For every year past your full retirement age that you wait to start receiving benefits, your payments will receive an 8% boost.

If you have enough income from other sources early in retirement, delaying the start of Social Security can mean an automatic increase in benefits that outpaces inflation. However, these increases end at age 70, so there is no benefit to waiting to start payments past this age.

The optimal time to claim Social Security benefits will vary depending on a variety of factors such as your health and marital status. Some financial planners specialize in Social Security and can help you make the best decision for your situation. Money Talks News partner Social Security Choices provides inexpensive advice on timing your Social Security claim.

Find the right financial adviser

Finding a financial adviser you can trust doesn't have to be hard. A great place to start is with SmartAsset's free financial adviser matching tool, which connects you with up to three qualified financial advisers in five minutes. Each adviser is vetted by SmartAsset and is legally required to act in your best interests.

If you're ready to be matched with local advisers who will help you reach your financial goals, get started now.

Read Next
7 Unexpected Perks of Downsizing as a Retiree
7 Unexpected Perks of Downsizing as a Retiree

Downsizing your home offers many benefits, including some you may not have anticipated.

3 Costly Social Security Mistakes That Women Make
3 Costly Social Security Mistakes That Women Make

Women face unique challenges when planning for retirement and making these mistakes can result in a skimpier retirement.

9 Things You Should Never Pay For With a Debit Card
9 Things You Should Never Pay For With a Debit Card

Use your debit card for one of these expenses, and you could risk your bank account balance, your credit score or even identity fraud.

15 Painless Ways You Can Cut Costs in 2020
15 Painless Ways You Can Cut Costs in 2020

Follow these tips to save — so you’ll have money for things that really matter.

Never Buy These 12 Things at a Thrift Store
Never Buy These 12 Things at a Thrift Store

Sometimes a great deal is not worth it — or, even worse, is dangerous.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

This Is the Most Popular Age for Claiming Social Security
This Is the Most Popular Age for Claiming Social Security

Both men and women are most likely to start receiving Social Security benefits at this age.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

6 Things You Should Never Buy at Trader Joe’s
6 Things You Should Never Buy at Trader Joe’s

We love Trader Joe’s for plenty of reasons. But think twice about this handful of products.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have these documents that are crucial to their golden years — especially during a pandemic.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

7 Unusual Ways to Declutter Your Home
7 Unusual Ways to Declutter Your Home

Tired of possessions weighing you down? Here are seven ways to declutter painlessly and effectively.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

9 Dumb Ways You Are Ruining Your Home Value
9 Dumb Ways You Are Ruining Your Home Value

Homeowners, beware these mistakes that can drive away potential buyers.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

10 Things That Really Are Free on Amazon
10 Things That Really Are Free on Amazon

These freebies are available to anyone — no Prime membership necessary.

This Is the Cheapest Place to Buy a Used Car
This Is the Cheapest Place to Buy a Used Car

Looking for a good deal on a set of wheels? This should be your first stop.

7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

11 Disgusting Household Items You Should Toss Already
11 Disgusting Household Items You Should Toss Already

Never keep these items past their prime.

18 Amazon Purchases That We Are Loving Right Now
18 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

10 Surprising Foods You Can Freeze — and How I Freeze Them
10 Surprising Foods You Can Freeze — and How I Freeze Them

How many of the foods have you thought to put in the freezer?

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.