How To Keep Inflation From Wrecking Your Retirement

By Matthew McIntyre

Your dollars and mine are not buying as much as they did just a short while back. Inflation has seen to that.

That’s not good news for anyone, but it’s especially troublesome for retirees, a fact that’s not lost on either current retirees or those saving for what they hope will be a secure and rewarding retirement some day.

A recent news report brought this discomforting news: One-fourth of Americans say they see rising inflation as the single greatest risk to their retirement plans. Compare that to 2020, when just 8% cited inflation as posing a risk to their retirements.

Inflation definitely can put your retirement at risk, but you don’t have to watch passively as bad things happen to your savings. Here are a few steps that can help you mitigate the risk and your concerns about it:

• Make sure you have a good handle on inflation’s ramifications. It’s one thing to hear about the inflation rate and agonize over it; it’s another thing to improve your understanding of what inflation could mean over time to your savings, investments, and cost of living. As they say, knowledge is power. At the time I write this, the latest Consumer Price Index shows a 6.81% rise, which is the highest increase in 40 years. To see what that means in reality, let’s put some dollar figures to it. Goods that cost you a total of $10,000 this year would cost $10,681 next year. If that rate continued over a 10-year span, you would need more than $19,000 to have the equivalent spending power of today’s $10,000. Under that scenario, your retirement savings better be providing a great return just to keep up with inflation, never mind beating it.

• Pay off credit cards. If at all possible, you will want to pay off your credit card balances because when inflation rises, interest rates are likely to go up as well. That means you will end up paying even more each month to your credit card company. One strategy for this is to check which of your cards has the highest interest rate and start there. 

• Rethink where you are investing your money in the market. As you review your portfolio, consider investing in high-quality dividend-paying stocks that have pricing power. Companies that have strong pricing power are able to raise prices with little or no reduction in the demand for their products or services, so they are less likely to see a drop in their value in inflationary times. Examples would include monopolies, luxury products and services, and products or services that are viewed as far superior to their competitors. In addition, commodities such as oil can be a hedge against inflation. In the past, gold also was seen as an inflation hedge, but unfortunately that’s not necessarily the case. For example, in the early 1980s, at a time when inflation averaged 6.5%, gold investors lost an average of 10%. At other times gold has indeed performed well during inflationary periods, but it shouldn’t be counted on as an inflation hedge.

• Consider purchasing Series I bonds. I bonds, issued by the United States Treasury, are a savings bond that earns interest based on both a fixed rate and an inflation rate. I bonds are currently yielding over 7.12% and that rate will continue at least through April, according to the Treasury Department. You can’t plow an unlimited amount of money into these bonds, though. The maximum purchase allowed each year is $10,000. Something else to be aware of is that you can cash I bonds after one year, but if you do so before five years has passed you lose the previous three months interest. The Treasury Department offers this example: If you cash in your I bond after 18 months, you get the first 15 months of interest. Still, if you have money you can invest over the long-term, I bonds are a good option for battling inflation.

The important thing to remember is that, when it comes to inflation, you should take control of your investment situation. Educate yourself, review strategies that work best for you, and if you don’t want to go it alone, find a financial professional who understands your needs.

Yes, the inflation risk is real – but if you make the right moves it doesn’t have to completely upend your retirement.

About Matthew McIntyre

Matthew McIntyre is the founder and the Chief Executive Officer of Peak American Financial Companies (www.peakamericanfinancial.com). He is a registered Investment Advisor Representative and has had a successful career in helping people with their retirement and financial needs for more than 30 years.