How to protect your retirement plans from inflation

How to Protect Your Retirement Plans from Inflation


Written by John Rothans

Aug 6, 2021

If the past is any indicator, you can expect to be paying more, not less, during retirement to maintain the same standard of living that you enjoy today. That’s pretty much the definition of inflation. Inflation also is a benchmark that the federal government uses to determine contribution limits to qualified retirement plans or to raise Social Security benefits. Therefore, inflation has the potential to impact you in more ways than one during your golden years.

Here, we empower you to plan for and combat inflation ahead of retirement.

What Is Inflation?

Inflation gauges the rate of increase in prices for goods and services in an economy over a period of time. Increases in inflation can be calculated in a few ways but are often measured by the Consumer Price Index (CPI). The CPI monitors the prices of hundreds of everyday items that people buy, such as groceries, clothing, and healthcare. The U.S. Bureau of Labor Statistics reports the CPI every month.

“Long-lasting episodes of high inflation are often the result of lax monetary policy,” notes the International Monetary Fund. “If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls, and prices rise.”

According to The Washington Post, if inflation gets too high, the Federal Reserve will likely raise interest rates in an attempt to slow down the economy and prevent spiraling inflation, which the U.S. experienced in the late 1970s and early 1980s. Higher interest rates typically result in higher costs to borrow money.

In July 2021, the U.S. inflation rate stood at 5.4%, up from 1% a year earlier. By comparison, since the emergence of CPI data, the highest inflation rate in the U.S. was 23.7% in June 1920.

How Does Inflation Affect Retirement?

Aside from leading to a potential hike in interest rates and a higher cost of borrowing money, high inflation can eat into your buying power and weaken the purchasing power of money. All of those factors could mean your dollar won’t stretch as far when you’re retired.

Also, inflation may affect contribution limits for qualified retirement plans, such as an employer-sponsored 401(k), as well as cost-of-living increases for Social Security. In addition, any savings you have tucked away may be affected if the interest rate for your account sits below the inflation rate.

How Can You Plan for Inflation During Retirement?

Fortunately, you can take several steps now to plan for inflation during retirement. Here are a few:

  • Minimize the impact of the dollar. To help shield your retirement portfolio from inflation, consider diversifying a portion of your portfolio away from asset classes that move in tandem with the U.S. dollar. For instance, you might want to ensure that your portfolio includes precious metals, commodities, foreign asset classes, and natural resources.
  • Look into real estate. Purchasing real estate or shares of real estate investment trusts (REITs) can be part of an inflation-aware retirement strategy. That’s because owning property can help safeguard you against the impact of inflation.
  • Stay in the workforce. While this might not be the most appealing option, holding down a job during retirement may supply salary and benefits that rise along with inflation.
  • Consider buying physical gold. Gold has proven itself to be a long-term hedge against inflation. Over time, gold returns have outpaced the CPI, reports the World Gold Council. In fact, gold has historically outperformed several other asset classes when the inflation rate has gone up.

Take it from Philip N. Diehl, president of U.S. Money Reserve and former director of the U.S. Mint: “Gold is wealth insurance.” Download our free Gold Information Kit to learn more about gold’s staying power over the centuries.


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