How Retirees Can Combat Inflation

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Inflation rose to 5% in May, the highest level that United States consumers have experienced since 2008.

Since inflation erodes purchasing power, seeing it rise can be worrisome if you’re about to retire and especially if you’re a retiree living on a fixed income.

Money expert Clark Howard says many people turn to investing in precious metals like gold to counteract inflation, but he has a different prescription. Keep reading to learn Clark’s tips on keeping your finances on track during times of inflation.


Table of Contents


Who Will Inflation Hit the Hardest?

It’s scary to think of running out of money before you die.

And no matter how much you’ve saved, inflation causes that money’s value to decrease over time. So making your money work for you, to keep up with the cost of living, is crucial.

The federal government makes cost of living adjustments (COLAs) to Social Security payments each year, but Clark points out that it’s not enough.

“Historically, people who are on Social Security surprisingly get hurt the most by inflation,” Clark says.

“The formula for the cost of living adjustment doesn’t properly account for how much medical cost inflation erodes the purchasing power of senior citizens. I find that people who are on fixed incomes are always the ones who have the most to lose from inflation.”


Current Situation: High Inflation (But Probably Not Long-Term)

You’ve probably seen the recent headlines about the price of almost everything going up, especially lumber, used cars and gas.

The Federal Reserve has even indicated it may increase historically low interest rates sooner than originally planned due to inflation.

According to U.S. News & World Report, the Fed “now sees its favored inflation measure rising at an annual rate of 3.4% in 2021, well above its goal of 2%, before receding to 2.1% in 2022.”

Fortunately, we haven’t seen double-digit inflation since December 1981. So at least in the U.S., things have been relatively stable for decades. Some level of inflation is part of the monetary system.

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Unexpected inflation — or worse, deflation — aren’t ideal, but the word “inflation” itself probably carries more of a negative connotation than it should.


How Inflation Can Erode Your Purchasing Power

There’s often no need to panic about unusual short-term inflation turning into some sort of economic death spiral.

But even “normal” inflation compounds into a big deal over time, especially if you’re not taking it into account in your financial planning.

Annual Retirement Spend (30 Years)Annual Inflation2032 Equal Purchasing Power2042 Equal Purchasing Power2052 Equal Purchasing Power
$75,0002.5%$96,006.34$122,896.23$157,317.57

The example in this table assumes 2.5% annual inflation for 30 years starting in 2022. You’ve saved enough money to spend $75,000 per year for three decades.

But you need to be cognizant of your purchasing power. If you’re barely able to afford your lifestyle in 2022 on $75,000 and you expect to live 30 more years, something will have to give. At 2.5% annual inflation, it will cost $157,317.57 to afford the exact same lifestyle in 2052.

That sounds ominous. And it shouldn’t be ignored in planning for retirement. But as Clark will explain shortly, the right long-term investment plan can increase the odds that your money will last for the rest of your life — and even beyond.


Clark’s Prescription To Compensate for Inflation

Historically, investors have turned to things such as real estate, commodities and precious metals to hedge against inflation.

In many cases, those decisions end up being inconsequential or even negative, as it’s virtually impossible to hedge against unexpected short-term inflation.

Clark says the best way to outrun inflation is to own equities even after retirement.

“During times of inflation, companies are able to move their prices up. Maybe at first they’ll meet price resistance, but the marketplace adjusts over time,” Clark says.

“So times of inflation are not a time to run away from stock investing. It’s actually one of the safest harbors to be in during an inflationary time.”

Over the long-term horizon, maintaining exposure to equities has historically been key to maintaining your purchasing power.

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There’s a clear distinction between strategizing to account for normal long-term inflation and dealing with unexpectedly high short-term inflation.

Research indicates that many common theories fall short, especially when it comes to “hedging” against inflation. In fact, according to the Rational Reminder podcast, there’s no such thing as an asset that’s a perfect inflation hedge. (A pair of Canadian financial advisors host the podcast, and they go more in-depth here on why commonly suggested assets like gold don’t respond positively to inflation.

Their conclusion is the same as Clark’s: A diversified portfolio is the best way to account for unexpected inflation.

Don’t Be Afraid To Ask for Help

Socking away enough money during your working years to fund your retirement can seem like a Herculean task, especially if you’re just starting out. But in many cases, figuring out the right way to liquidate and spend that money during retirement can be even trickier.

Stocks are riskier than bonds, and you don’t want too much risk in your investment portfolio during retirement. But it’s important for many people to hold stock in order to outpace inflation.

One option is to hire a fiduciary financial advisor, especially if you’ve accumulated a nice-sized portfolio. But your strategy can be much simpler.


Target Date Funds Can Combat Inflation

If you’ve followed Clark for a while, you may guess what’s coming next: target date funds. Typically found inside a 401(k) or IRA, a target date fund slowly reallocates your portfolio over time, starting primarily with stocks and eventually reaching a much more conservative mix.

Most target date funds are “through funds.” That means, if you’re invested in a 2045 retirement fund, your portfolio won’t reach its final, most conservative allocation in January of 2045. Rather, your fund manager will slowly reduce the percentage of your portfolio devoted to stocks for a number of years past 2045.

“So one of the beauties of the target date fund is they keep you from in retirement being too conservative with your money,” Clark says.

“Because the great risk from [your] retirement [date] on is what inflation does to erode your purchasing power. And that’s why it’s really important that your portfolio even in retirement still has a big emphasis on stocks.”

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Consider Keeping Some of Your Portfolio Liquid

Social Security, pensions, 401(k) plans, IRAs and savings accounts are just a few of the income sources upon which retirees rely.

No two retirement plans are alike. Let’s say you have a pension and you’re getting Social Security. Or you’re used to a thrifty lifestyle and Social Security will cover a meaningful amount of your monthly expenses.

In those cases, you may be able to be less conservative with your investments even in retirement. You may already have a baseline income that covers some or all of your expenses without depending on tapping your investments.

But perhaps you’re relying heavily on your investments to fund your lifestyle in retirement. In that case, Clark says it’s a good idea to keep three years of expenses, minus Social Security, in something more liquid. Options include a savings account, a CD, a money market account and Series I bonds.

Selling off the same dollar amount of your investment portfolio during a market downturn (due to unexpected inflation or any other reason) can eliminate your retirement nest egg too fast. Regardless of inflation, if you have three years of expenses accessible to you, you can wait until the market gets healthier before drawing from it again.

“That way, you never are forced to sell into the teeth of a declining [stock] market,” Clark says. “If you have three years of money that doesn’t force you to sell things at a bad time, you’re good.”

It’s not a bad idea to hire an hourly fiduciary financial advisor from the Garrett Planning Network if you want to make sure you’re following a wise strategy. Clark stresses that each person’s financial situation is different.


Final Thoughts

Inflation can be nerve-wracking, especially when prices are spiking. And there’s no guarantee that inflation will always be stable. But sustained out-of-the-ordinary inflation has been virtually nonexistent in the United States since the early 1980s.

The bigger deal for most people is normal inflation that plays out over a long period of time (like the length of the average retirement). Don’t forget to take into account that $1 today will have more purchasing power than $1 in 20 years. And remember that it’s a good idea to maintain at least some exposure to stocks even into your retirement years.


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