3 Ways to Plan for Inflation in Retirement

Practical steps to protect your retirement income

Mature couple looking at financial paperwork in their living room
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Upcoming retirees may be too worried about inflation. Financial planners and online advice articles often say you’ll need an ever-increasing income to maintain your purchasing power. But studies of real retiree spending patterns tell a different story.

Key Takeaways

  • Spending during retirement starts high, drops off, and gets high again in your 80s when you're spending more on healthcare. Inflation may affect the third phase of your retirement.
  • Retirees with higher incomes can weather inflation better than those who are living on less money.
  • Make sure you get the most from Social Security to protect your future retirement income against inflation. Choose investments that hedge against inflation, and find ways to save at home.

Your Life Phase

Spending in retirement can be broken into three phases: the go-go years, the slow-go years, and the no-go years. Spending is high during early retirement (the go-go years). Retirees travel, shop, golf, fish, and actively enjoy their free time. Depending on their health, this phase spans ages 55 to 75.

Then come the slow-go years. Whether due to health or simply age, you stay home more. You shop and travel less. Spending in inflation-adjusted terms has been shown to decrease during this phase, which spans the 70-to-85-year age range.

Spending on healthcare replaces what used to be spent on entertainment items during the no-go years. Spending creeps back up in inflation-adjusted terms during this time, usually in your 80s and beyond.

Your Income Level

Your income level also determines the effect that inflation has. Higher-income retirees have room in their budgets to absorb price increases on essentials. Inflation doesn’t have a huge negative impact on this group. Increases in basics like food, energy, and medical care take a bigger bite out of the budgets of lower-income retirees.

Assume that expenses will go up by 3% each year when you're projecting retirement success. This is in line with historical inflation rates. Then you can begin working on a “spend more now plan,” which may mean fewer income increases later. This type of planning can allow more spending in the go-go years. The goal is to find the balance between enjoying life now and holding enough financial reserves to account for later life, too.

You can do three things to protect your future purchasing power.

Get the Most From Your Social Security 

Social Security has automatic, built-in cost-of-living adjustments. It's a unique, life-long inflation-adjusted source of income, and smart planning can help you get more out of it. The cost-of-living adjustment (COLA) for 2022 is 5.9%.

Almost one-third of retirees will rely on Social Security to provide 90% of their retirement income. More than half will rely on Social Security for more than 50% of their retirement income.

One of the most important things you can do to protect yourself against rising prices is to make sure you get the most out of your Social Security benefits, for both you and your spouse, by choosing to defer SSI income until you are 70. 

Choose Investments That Rise With inflation

Some investments and insurance products are more likely to keep pace with inflation than others. The trade-off may be less income now, but more income later. Some common choices are categorized into safe, medium, and aggressive levels of risk.

Safe Investments

Medium-Risk Investments

Aggressive Investments

What about gold? Despite the common belief that holding gold is a good way to hedge against inflation, it has been a better crisis hedge in the past than an inflation hedge. That means during times of slow steady inflation, gold hasn’t kept up, but it soars during times of crisis.

Go Green, and Grow a Garden

The best thing you can do is buy everything you might possibly need now if you really expect inflation to kick in. Make yourself as self-sufficient as possible.

Stock up on durable goods now if you're worried that prices will rise quickly. Make your home as energy-efficient as possible, reducing your exposure to rising energy prices. Grow your own garden, and if you can, get livestock, or at least a few chickens. You'll be insulated from inflated food prices, and, if necessary, you'll have something to barter.

Try to live in a community where you can walk, bike, or take public transportation for your daily needs. This reduces your dependence on potentially rising insurance, gas, and maintenance costs.

Bonus: Insurance

Some insurance products can help you protect against inflation as well. Remember that your healthcare costs will probably rise as you age. Prices become even higher when you add inflation to your healthcare costs. Long-term care insurance can help to protect your wealth from the high costs of care later in life.

Article Sources

  1. Macrotrends. "U.S. Inflation Rate 1960-2021."

  2. Social Security Administration. "Social Security Announces 5.9 Percent Benefit Increase for 2022."

  3. Social Security Administration. "Fact Sheet," Page 1.

  4. Social Security Administration. "Retirement Benefits."

  5. Duke Fuqua School of Business. "Gold's Wild Ride."