Five Ways to Protect Your Retirement Against Inflation

After decades of tame inflation, it spiked sharply in April 2021, reaching 3.4% on an annualized basis. If sustained over a year, that would be more than twice the average inflation rate over the last decade and a half.  

If you’re close to retirement age, that rate of inflation is enough cut your spending power in half during your lifetime. It therefore can be a real threat to your lifestyle in retirement.

Here are five moves you can make to help protect yourself against inflation:

1. Reduce your cash position. As of May this year, money market accounts pay an average of 0.07%, according to Bankrate data. Some are paying close to 0.5%. Even the best, highest-yielding money market accounts and CDs may not keep close to keeping up with the current inflation rate.

Tip: Keep just enough cash to see you through emergencies, and keep the rest invested.

2. Maintain some stock market exposure. Yes, most people should reduce stock market risk as they get older. But you don’t want your stock allocation to go to zero.

Over long periods of time, the stock market historically beats inflation. Today’s 65-year-olds can expect to live another 18-20 years or more, on average.

Tip: Keep something invested for the long haul.

3. Consider annuities. Only annuities can provide a guaranteed income for you and your spouse that you cannot outlive.

Tip: Consider an annuity with a cost-of-living rider, which automatically increases your income to keep pace with inflation, guaranteed. You’ll receive a lower initial payout, but you’ll have some protection against inflation risk.

4. Delay taking Social Security benefits. You can begin taking benefits at age 62. But if you’re in decent health, it usually makes sense to wait until your full retirement age, or even until age 70, if possible. Every year you wait increases your eventual benefit by 8%. That higher benefit also gets adjusted for inflation each year.

Delaying Social Security benefits may also help you reduce or eliminate income taxes on Social Security benefits.

Tip: If you believe you’ll have a hard time waiting, consider working longer, and working with your advisor to use annuities or other income-generating assets to create a bridge income until you do begin taking Social Security.

5. Consider real estate. Along with owning your own home, investing something in real estate may help you diversify against both inflation and stock market risk.

Real estate is cyclical, but the overall growth trend continues to be strong. And even if there is a pullback in prices, they are usually short-lived.

Tip:¬†You don’t have to be a landlord to invest in real estate: It could be as simple as allocating something to a real estate investment trust fund within your 401(k).

Leave a Reply