5 Ways Retirees Can Lower Their Inflation Risk

Advertising Disclosure: When you buy something by clicking links on our site, we may earn a small commission, but it never affects the products or services we recommend.

Couple reviewing financial documents in their kitchen
Inside Creative House / 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?

GTbov / Shutterstock.com

Inflation risk is the danger of your money losing its purchasing power over time. Products become more expensive because of inflation — as we’re seeing right now — 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 (CPI). It uses the prices of consumer goods and services to determine the annual inflation rate. For most of the past decade, inflation was around or below 2%.

Inflation is unlikely to remain that low 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%. In fact, the Federal Reserve Bank of Minneapolis currently estimates that the inflation rate for 2021 was 4.8%.

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. As of January 2022, that person would need an annual income of $83,278 to have the same buying power as they did 22 years ago. That’s according to a CPI inflation calculator from the U.S. Bureau of Labor Statistics.

You can address inflation risk by using the following strategies.

1. Invest some money more aggressively

Older couple thinking about their long-term investments
ESB Professional / Shutterstock.com

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 investments, as opposed to income (dividend-paying) investments.

“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

Retiree reviewing financial documents in his kitchen
Monkey Business Images / Shutterstock.com

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. Series I savings bonds, also known as “I bonds,” are another.

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.

3. Purchase an inflation-protected annuity

Happy woman thinking about retirement
fizkes / Shutterstock.com

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 financial 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 $488 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% to 30% lower.

Some annuities offer variable payouts that can increase each year, although these increases may not be guaranteed or tied to the inflation rate.

Annuities are complex products, and so it is best to consult with a financial professional who is a fiduciary (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

Senior couple using a tablet
Chaay_Tee / Shutterstock.com

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.

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

Social security card with a fee schedule and a calculator
chuckstock / Shutterstock.com

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

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 claim.

Get smarter with your money!

Want the best money-news and tips to help you make more and spend less? Then sign up for the free Money Talks Newsletter to receive daily updates of personal finance news and advice, delivered straight to your inbox. Sign up for our free newsletter today.