Spooked About Inflation? Here's How to Stop It From Wrecking Your Retirement

For decades, inflation remained well under control in the U.S. But in recent years, prices have exploded higher.

Soaring costs can frighten retirees or near-retirees. If you are worried about the eroding purchasing power of your dollars, here are some things you can do to lower your financial stress.

Recent inflation trends

It's not your imagination: Prices are much higher today than they were a few short years ago.

Experts say today's costs are more than 20% higher than they were in January 2021. Inflation had been slowing until recently, when it began to pick up again.

In May, prices rose 4.2% year over year, the first time in three years that inflation crept back over 4%.

A lot of people are waiting for prices to fall back to earth, but that is unlikely.

How to fight back against inflation

Rising prices threaten everyone. But perhaps no one feels the shock to their wallet as much as retirees who can no longer count on regular paychecks.

The following tips may help you keep inflation from wrecking your retirement.

Maintain meaningful equity exposure

In retirement, people typically shift their asset allocation to more conservative investments in an attempt to reduce the level of risk they face. However, abandoning the stock market altogether may not be wise.

Stocks have historically outpaced inflation over long periods. By contrast, if you move all your money to bonds and stocks, you may begin to lag behind rising prices.

Many experts suggest something along the lines of a 50/50 stock-bond mix as a way to create a prudent balance of safety and risk. Consider consulting with a financial advisor who can offer guidance on this topic.

Add TIPS to your portfolio

The federal government created Treasury Inflation-Protected Securities (TIPS) to protect investors against inflation.

Most other Treasury securities maintain a fixed principal, but the principal of TIPS can rise or fall based on changes in the Consumer Price Index.

TIPS are available in terms of five, 10, or 30 years and can be a good hedge against rising prices.

Delay filing for Social Security

Most Americans become eligible for Social Security benefits when they turn 62. But if you delay filing, your monthly benefit will increase.

For most Americans today, 67 is the full retirement age. If you wait until then to file, your monthly benefit will be much larger than if you claim at 62. And for every year you wait to file between 67 and 70, your benefit increases by 8% per year.

Once you turn 70, there is no additional benefit to waiting. So, be sure to file no later than that year.

Consider other investments as inflation hedges

Several types of investments can act as hedges against inflation.

For example, dividend-growth stocks consistently raise the dividend payouts they make to investors. This can provide a steady and increasing stream of income for retirees.

As rents rise, real estate investment trusts (REITs) can see revenues climb, and investors may benefit from increased dividends.

I-bonds are another type of investment designed to protect you from the ravages of higher prices. The interest rate on these bonds adjusts for inflation every six months.

Clamp down on your spending

You can't control the direction of prices, but you do have some say over how much you spend.

So, find ways to cut back on spending. Eat out less often and take fewer exotic vacations. If you are a two-car household, consider selling one vehicle.

Tough times call for difficult choices. The less you spend, the healthier your budget will be.

Consider taking on part-time work or a side hustle

The very definition of retirement is a period where you no longer work. But sometimes, reality upsets those plans.

If rising costs are creating slow leaks in your budget, consider shifting to a semi-retired lifestyle. Take on a part-time job or develop a side hustle.

The longer you avoid tapping your nest egg, the better your odds of making your money last in inflationary times.

Purchase rental real estate

Buying an income property can be an alternative to part-time work that generates monthly income.

This is not for the faint of heart, however. Life as a landlord can come with many headaches. Still, getting monthly rental income can provide a huge boost to your financial well-being.

Bottom line

When it comes to warding off the impact of inflation, it is likely that no single strategy is sufficient.

The best retirement plan for your money is likely to be a strategy that combines multiple inflation hedges matched to different time horizons.

Some retirees will feel comfortable creating their own strategy to combat inflation. For others, sitting down with a financial advisor, tax professional, or both can be helpful.