4 ways to protect your retirement savings from inflation

4 ways to inflation-proof your retirement

February 24, 2023 7:54 PM

Over the past two years, inflation in the U.S. has reached levels not seen since the early 1980s.

Inflation is a natural enemy of retirement savings. No matter how much money you stash away, rising prices can erode the value of those dollars. But retirement savers aren't helpless. There are many things they can do to guard their nest eggs from spiking consumer prices — and even use those higher costs to their advantage.

"Higher inflation has some benefits," said David Edmisten, the founder of Next Phase Financial Planning in Prescott, Arizona. "Savvy retirees can make adjustments in their financial plans to help them remain confident in their retirement."

Edmisten is one of many financial advisors guiding their clients through the storm of soaring costs on items from groceries to furniture — and it's not clear when that storm will end. By one popular measure, the year-on-year increase in the consumer price index, inflation has fallen for the past seven months straight. On the other hand, the number that measure landed on — 6.4% in January, the most recent reading — was still one of the highest since the early 1980s. Even as the rate of increase comes down, prices remain stubbornly high, and prices for many goods and services have spiked well above that official rate.

Understandably, clients are anxious. More than 70% of Americans aged 50 and older are worried inflation will cause "serious hardship" during their golden years, according to a survey by Kiplinger, a business publisher. And 40% of U.S. workers are already postponing retirement due to the rising cost of living, a study by the Nationwide Retirement Institute found.

But for all those nervous investors, wealth managers across the country have a simple message: Don't panic. There are many tools retirees and soon-to-be-retirees can use to fend off the inflation beast, whether it's investing in bonds, opening a high-yield savings account, getting the most out of Social Security or simply saving more money.

"As individual citizens, we don't have much control over inflation," said Spencer Stephens, the owner of Rooted Interest Financial Planning in Holladay, Utah. "However, we do have control over how we use the money we have worked so hard for."

Here are advisors' tips for how to take back that control:

Harness the storm

Not every investment suffers in times of rising prices. Some actually perform better, and retirement savers can use them to profit from inflation.

That's because as the Federal Reserve raises interest rates to cool down the economy, the rate hikes drive up the returns on high-yield savings accounts, bonds and certificates of deposit (CDs). Some high-yield savings accounts currently offer 3.5% interest, and even six-month U.S. Treasury bonds now yield more than 5%.

"Bonds are finally a good alternative to stocks!" said Eric Amzalag, the owner of Peak Financial Planning in Los Angeles. "And with the Federal Reserve signaling more rate hikes to come, investors might even be able to obtain higher yields in the coming months."

Keep growing

At the same time, many wealth managers advise against giving up on high-growth assets. Though stocks carry more risk and are prone to volatility, they have two advantages: In the long run, the U.S. stock market has tended to outpace inflation. (Still, Hartford Funds said that while equities outperform inflation 90% of the time when inflation is below 3% a year, they "fare no better than a coin toss" when prices are rising above that level.) In the short run, many stocks issue dividends that can be reinvested — or used to cover rising expenses.

"It doesn't matter if you are retired or more than 20 years from retirement," said Nicholas Bunio, a certified financial planner at Retirement Wealth Advisors in Downingtown, Pennsylvania. "You should never shy away from stocks completely."

Edmisten echoed this advice, adding that the same goes for another high-growth investment: housing.

"Retirees should stay committed to maintaining an allocation to growth assets, such as stocks and real estate, which have historically provided positive returns above inflation over the long term," Edmisten said. "Retirees should resist the temptation to get rid of more volatile assets that may provide a better chance against inflation over the long term."

Sit tight on Social Security

Another piece of advice can seem counter-intuitive: Hold off on collecting Social Security.

For people rapidly approaching retirement age and struggling with high expenses, it may be tempting to start cashing in on the benefit as soon as possible. Americans can claim the benefit as early as age 62, but advisors warn that doing so is shortsighted. The closer people are to their full retirement age — either 66 or 67, depending on when they were born — the larger the checks will be. Waiting even longer to claim adds an extra percentage to payments for each additional month of delay, all the way up to age 70.

In the meantime, almost every year — but not always — Social Security gets a cost-of-living adjustment. Though the boostmay not fully compensate for higher consumer prices, itcan be quite generous — for 2023, the COLA was 8.7%, the biggest increase since 1981.

So when it comes to Social Security, it pays to wait.

"By far, the best option is to delay taking Social Security benefits as long as possible," said David Hultstrom, the president of Financial Architects in Woodstock, Georgia. "That is equivalent to buying an inflation-adjusted pension with no credit risk and protected from creditors to boot."

Rethink your expenses

Finally, one of the most common tips is the most obvious: Save more money.

This may sound simple, but it's often the advice that requires the most coaching. Financial advisors can help clients research their purchases, shop around for insurance companies, do better tax planning and dig up many other opportunities for savings.

"I think it's imperative to help retired clients maximize their lifestyle," said Tracy Sherwood, the president of Sherwood Financial Management in Williamsville, New York. "Take advantage of the additional time in their schedule and use that to their advantage to plan."

Above all, advisors can help clients determine which of their expenses are the most valuable to them. In some cases, retirees may still be able to afford the things they find most fulfilling — fun vacations, visits with grandchildren — as long as they trim the fat in other areas.

"Higher prices and tighter budgets provide an opportunity for retirees to evaluate what is most important to them in their spending plans," Edmisten said. "It may be prudent to review one's budget and reduce or eliminate expenses that do not align with their most important values."

In the end, the sturdiest weapon against inflation may also be the simplest.

"When in doubt, the best long-term strategy is always to save more," Amzalag said.