Inflation in Retirement: How to Protect Yourself


While inflation continues to be a concern for everyone, its impact on retirees may be the most significant. If you’ve stopped working, you certainly don’t have the opportunity for the corresponding pay increases that could be available in this tight job market. This week, we examine inflation, its causes, and the moves you can make to protect your retirement.

What Causes Inflation?

Inflation is the increase in the prices of goods and services and the corresponding decrease in the purchasing power of money. There are three main causes of inflation:

  1. Demand-Pull Inflation. When consumers have more disposable income, they tend to spend more, causing an increase in prices.
  2. Cost-Pull Inflation. When there is a scarcity of goods and services, prices tend to increase accordingly.
  3. Monetary Inflation. When governments print more money, a corresponding increase in productivity isn’t immediate. This tends to drive prices higher.

Right now, we’re seeing spikes in all three causes of inflation. As of the end of October 2021, inflation spiked to 6.2% over the trailing 12 months – it was the biggest monthly rise in 30 years.

How Does Today’s Inflation Compare to History?

Since the BLS began measuring it in 1913, inflation has averaged 3.10% on an annualized basis in the U.S. Of course, there have been times where inflation was much higher. In the 1970s, for example, inflation ran at an annualized rate of 7.25%. It spiked to 13.58% in 1980 alone.

More recently, inflation has averaged 2.14% per year – much lower than the long-term average – since the Great Financial Crisis.

While 2% or 3% may not sound like much, this adds up over time. In 1973, when I was born, a gallon of whole milk cost somewhere around $1.57. Today, it costs between $3.53 and $6.63 at my local Publix, depending on whether you buy the organic stuff or not. That’s an increase of somewhere between 125% and 322% over my lifetime.

I also think it’s interesting to note that, since the U.S. left the gold standard in 1971, inflation has averaged 3.92% per year. This is a marked increase from the average of 2.46% prior to the gold standard being abandoned.

And they say fiat money is just as good.

How Does Inflation Affect Your Retirement?

In retirement, inflation is your arch enemy. If everything you need to buy keeps going up in price, then your money needs to grow faster than prices.

It’s not enough to say that inflation is bad. Let’s do the math. If we look at the average American retired household from our prior blog post, they spent $47,579 per year. Someone who is 60 today would need around $483,000 in investment assets at age 65 to fund that kind of spending.

In those calculations, we assumed an inflation rate of 3%. But how would things change if inflation jumped to 4%?

Instead of needing $483,000 of investment assets, they would now need $507,000 – almost $24,000 more – to offset that extra 1% of inflation over just 5 years. They’ll need to save an extra $300 every month between now and retirement.

We can also look at this the other way. If they see an extra 1% inflation over the next five years, they’ll have to reduce their retirement spending by $80 per month for the rest of their lives.

What About Cash Holdings?

Higher inflation makes holding cash less appealing. Because interest rates have been held so low for so long, it’s given rise to the idea that “there is no alternative” to investing in risk assets. TINA is another acronym that the last few years have given us.

If your cash isn’t yielding a higher rate than inflation, your real purchasing power declines over time. When viewed in isolation, it doesn’t make much sense to hold cash in today’s environment.

However, our decisions on cash holdings can’t be made in isolation. Given the current extreme market valuations, it’s perfectly rational to expect lower-than-average stock returns over the coming years. At some point, we will see some sort of correction. (We always do). Remember, there have been plenty of long stretches in U.S. history where treasury bills have outperformed stocks.

In other words, while it may feel like we’re getting punished for holding cash, it’s not a decision we can make in isolation. We need to think about cash in terms of its liquidity for daily living and optionality when a buying opportunity presents itself.

How You Can Protect Against Inflation in Retirement

Fortunately, there are a few moves you can make to protect yourself against inflation. Unfortunately, there’s no magic bullet. If you have a mortgage, especially if it has a variable rate, you may want to consider refinancing if you haven’t already. At some point, interest rates will need to rise due to these inflationary pressures, which could mean much higher interest payments.

Just as with variable-rate mortgages, you may want to pay down any credit card balances you have. Culling your budget can also offset price increases in other areas. Are there any streaming services and gym memberships in there that you don’t need or use? You can also investigate flat-fee billing options from your utility companies.

Consider stocking up on household staples if you haven’t already. If they’re going to be more expensive next month, why not replenish your personal inventories? Given our current supply chain issues, it may not hurt to have a little extra on hand.

When it comes to your investments, the best move is to add TIPS – Treasury Inflation Protected Securities – to your portfolio. Other asset classes such as commodities and REITs are also considered inflation hedges but note that they can be volatile at times.

Of course, we can’t discuss inflation these days without mentioning gold or cryptocurrencies. Traditionally, gold has been an inflation hedge with a track record that extends back for millennia. Conversely, cryptocurrency excitement is off the charts. There appears to be a future for cryptos, although I personally believe that they are overpriced at the moment.

However, each person has unique needs when it comes to their portfolio. Be sure and consult your financial advisor before making any portfolio changes.

Inflation in Retirement: The Hill We Must Climb

Inflation is the hill our retirement investments must climb to sustain us financially. Months and years with spikes in inflation are not uncommon in our history, but that doesn’t make navigating them any easier. Unfortunately, there’s no magic way to escape these periods of high inflation. The best strategy is to focus on doing the little things right.

If you need help protecting yourself from inflation in retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation. We often mention books and other products that we feel might find helpful. Wherever possible we use referral links; if you click one of the links in this video or description and make a purchase, we may receive a small commission or other compensation. We participate in the Amazon Services LLC Associates Program, an affiliate advertising program designed to allow us to earn fees by linking to and related sites.
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