3 Ways to Plan for Inflation in Retirement

Practical steps to protect your retirement income

mature couple looking at financial paperwork
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As an upcoming retiree, could you be too worried about inflation? Maybe so. 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.

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.

During early retirement (the go-go years), spending is high. Retirees travel, shop, golf, fish, and actively enjoy their free time. Depending on health this phase spans ages 55-75.

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

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

Your income level

Your income level also determines the effect inflation has. Higher income retirees (75k annual incomes and greater) have room in their budget to absorb price increases on essentials – inflation doesn’t have a huge negative impact on this group. For lower income retirees increases in basics like food, energy, and medical takes a bigger bite out of their budget.

When projecting retirement success, my preference is to start by assuming expenses will go up by 3% a year, in line with historical inflation rates. Then we begin working on a “spend-more now plan” which may mean less 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.

There are specific steps you can take to make sure your retirement income is likely to increase with inflation. Here are three things you can do to protect your future purchasing power.

1. Get the most from your social security 

Social Security has automatic cost-of-living adjustments built in. It is a unique life-long inflation-adjusted source of income - and smart planning can help you get more out of it. Almost one-third of you will rely on Social Security to provide 90% of your retirement income. More than half of you will rely on Social Security for more than 50% of your 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). 

2. 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. Choices below 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, in the past gold has been a better crisis hedge than inflation hedge. That means during times of slow steady inflation, gold hasn’t kept up, but it soars during times of crises.

3. Go green, and grow a garden

If you really expect inflation to kick in, the best thing you can do is buy everything you might possibly need now, and make yourself as self-sufficient as possible. Start with these ideas:

  • Stock Up - If you are worried that prices will rise quickly, stock up on durable goods now. 
    • Go Green - Make your home as energy-efficient as possible, reducing your exposure to rising energy prices.
    • Grow a Garden - Grow your own food, 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 with.
    • Walk, Bike, Ride - 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.