Inflation and Retirement

You've planned for retirement. But there's one thing that can sneak up on even the most careful planners: inflation. It's not a flashy concept, but it can quietly eat away at your savings if you're unprepared.

Inflation is like a slow, steady leak in a tire. It doesn't seem like much at first, but you realize the impact over time. The same goes for retirement. Prices rise. The cost of everything from groceries to healthcare creeps up. If your income doesn't keep pace, your buying power dwindles. And over the years, that could become a problem.

Inflation and Retirees

Inflation is the gradual increase in the price of goods and services over time. It's why a movie ticket costs $15 today when it used to be $5. A dollar today won't buy what it could ten years ago, and that trend will likely continue.

Now, picture this over 20 or 30 years of retirement. If inflation averages 3% annually, the cost of living doubles in roughly 24 years. That means the money you've set aside needs to stretch much further than you may expect. Everything costs more, but your savings stay the same. The math doesn't add up.

When you're retired, your ability to adapt to rising costs becomes limited. You're no longer earning a paycheck and are likely drawing from your savings or relying on fixed income sources like Social Security or pensions. The problem? These income streams don't always keep up with inflation.

Social Security does offer cost-of-living adjustments, but they don't always match real-world inflation in your location. Other sources, like pensions, might not adjust at all. So, while prices are rising, your buying power might lag behind.

And it's not just the obvious expenses like food and housing. Healthcare costs tend to rise faster than the general inflation rate, making them a double-whammy for retirees. If your savings and income aren't keeping pace with inflation, you could find yourself in a situation where your money just isn't stretching far enough.

How Can You Protect Against Inflation?

There's no avoiding inflation (and inflation itself can be unpredictable), but there are ways to help protect your financial life from its impact. Here are a few ideas for preserving your purchasing power:

Delay Taking Social Security

Social Security isn't just a paycheck in retirement. It's one of the few sources of income that adjusts for inflation every year. The longer you delay taking Social Security - up to age 70 - the bigger your monthly check will be. And because it's adjusted for inflation, waiting can give you a larger, inflation-protected income stream for life.

If you're healthy and can afford to delay, holding off on Social Security can be a smart way to maximize your income, especially in the later years when inflation is likely to have more of an impact.

Stay Flexible with Your Spending

Inflation doesn't happen in a straight line. Some years, it's higher; some years, it's lower. That's why it's important to stay flexible with your spending. In years when inflation spikes, you may need to cut back. In years when inflation is low, you can afford to relax a bit.

The key is not locking yourself into a rigid budget that consumes all of your income. Keeping a flexible mindset allows you to adjust as inflation ebbs and flows. Monitor your spending, and be ready to make changes as needed.

Consider Part-Time Work

Inflation is unpredictable. If rising costs are eating into your retirement savings, consider picking up part-time work or creating a small stream of side income. Whether freelancing, consulting, or turning a hobby into a business, having a little extra income can help ease the pressure.

An extra source of income doesn't have to be full-time or stressful. Even a small amount of additional income can go a long way toward covering rising costs.

Consider in Inflation-Protected Securities

Want a guaranteed hedge against inflation? Consider Treasury Inflation-Protected Securities (TIPS). These are government bonds that adjust with inflation. As prices rise, the value of TIPS rises, too.

TIPS won't make you rich, but they can be a safe way to hedge against inflation. They may be a good option for a conservative portion of your portfolio. If the thought of stock market volatility makes you lose sleep, TIPS can offer peace of mind since your investment is adjusting with the overall rate of inflation (but not inflation in your specific location - which could be higher or lower).

You can buy TIPS through most brokerage accounts or directly from the government through the TreasuryDirect.gov website.

Don't Forget About Growth Assets

Stocks? In retirement? It might sound risky, but stocks have historically outpaced inflation. Over the long haul, they tend to offer the growth you may need to keep up with rising costs. While it's tempting to go all-in on safer investments like bonds, growth assets can be helpful to protect against inflation.

Yes, stocks come with risk. They're volatile. But if you keep a portion of your retirement portfolio in stocks - especially in the early years - you give your savings the chance to grow faster than inflation.

A balanced portfolio is key. Too much risk, and you'll stress every time the market dips. Too little risk, and inflation quietly chips away at your nest egg. The sweet spot is finding a mix of stocks and bonds that fits your comfort level while still giving your money room to grow.

When making decisions about the allocation of your portfolio, the personalized help of a qualified professional can be invaluable.

The Takeaway

Inflation is sneaky. It doesn't cause immediate panic like a market crash, but over time, it can do just as much damage to your retirement. The good news is that with some smart planning, you can take steps to protect yourself.