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6 Ways to Protect Your Money from Persistent Inflation in Retirement

October 12th, 2023 | 4 min. read

By Ryan Theisen, CFP®

retiree facing inflation

Inflation poses a significant challenge to retirees. When on a fixed income, even modest inflation can erode purchasing power, making it difficult to maintain your standard of living.

Consider how inflation can diminish the value of your assets over a lengthy retirement. For example, a retirement portfolio valued today at $500,000 would only buy the same amount of goods as about $275,000 in 2000.

During the COVID pandemic, the government’s economic stimulus efforts resulted in significant inflation, which may persist above the Federal Reserve’s desired 2% rate. This has prompted numerous current and prospective retirees to question how best to shield their retirement from ongoing inflationary pressures.

At Advance Capital Management, we believe retirement should be a period of life you eagerly anticipate, not one overshadowed by concerns of a diminishing lifestyle. Since 1986, we’ve helped people navigate difficult economic and market environments to pursue their retirement goals. So, we know a thing or two about the importance of resilience and adaptability. (Click here to learn more about our retirement planning services.)

Addressing inflation during retirement requires strategic planning. Primarily because the impact of inflation varies based on your personal situation, including your assets, location and expenses. Here are some effective moves that can help you protect your retirement savings and sustain your quality of life.

Are you taking the right steps to reach retirement? Download right now your free retirement planning guide designed to help you no matter where you are in your retirement journey.

1. Keep Pace with Stocks in Your Portfolio

Given the possibility of a retirement spanning over 30 years, maintaining a segment of your investments in stocks is advisable. Historically, stocks have consistently outpaced inflation, providing retirees with growth benefits.

While traditional advice often leans towards a conservative approach as retirement nears, overly cautious strategies can be counterproductive. The inherent growth potential in stocks can not only provide positive returns but also act as a shield against inflation’s eroding effects.

Instead of drastically shifting from, say, a 70/30 stock-to-bond allocation to a more conservative 20/80 mix, consider a more gradual adjustment. A balanced 50/50 or 40/60 portfolio might be more appropriate, tailored to your financial standing and retirement objectives.

To determine the right mix for you, consider professional investment management help from a financial adviser.

2. Choose the Right Time to File for Social Security

Although Social Security offers an annual cost-of-living adjustment (COLA) based on the Consumer Price Index to combat inflation, it might not suffice for many retirees, especially with expenses like prescription drugs and utilities often rising faster than general inflation.

One strategy to enhance your Social Security benefits is to delay claiming them. By holding off until age 70, you can boost your benefit by up to 8% annually.

However, remember that while this means a more substantial income from Social Security in your later years, you might need to rely on your savings to sustain you in the interim. It also depends on your marital status, as your claiming strategy may impact your spouse’s benefit options.

Overall, if you have limited other income sources and expect a longer lifespan, postponing your claim could be a prudent move. Check out this article to learn more about the pros and cons of claiming Social Security early vs. delayed.

3. Maintain a Flexible Withdrawal Rate

Rather than adhering to a fixed withdrawal rate from your retirement savings, it’s beneficial to adopt a more adaptable approach that adjusts based on inflation rates and prevailing market conditions. Such an approach, commonly referred to as a “dynamic withdrawal strategy,” can not only help preserve capital during market downturns but also provide the flexibility to capitalize on periods of market growth.

This method encourages a more responsive and strategic use of your savings, reducing the risk of prematurely depleting your funds and ensuring that your withdrawals align more closely with the economic landscape.

4. Consider a Lump Sum Pension

If you're entitled to a pension, you face a choice between monthly annuity payments or a one-time lump sum. Both have their advantages and challenges.

A monthly pension annuity promises a consistent income, but it might not account for inflation, potentially eroding its buying power if there's no cost-of-living adjustment.

Conversely, opting for a lump-sum payout allows for investing your funds in an individual retirement account (IRA) and potentially outpacing inflation. However, this introduces market risk. The best choice hinges on your financial circumstances and risk tolerance. This article provides more details on making the decision between an annuity and a lump-sum pension.

5. Stay Employed or Pursue Part-time Work

Extending your working years, even by just a little, can have a significant impact on your retirement security. A study by the National Bureau of Economic Research found that delaying retirement by as short a time as three to six months can have the same effect on retirement standard of living as saving an additional 1% of labor earnings for 30 years.

By continuing to work, you not only contribute further to your retirement savings but also reduce the number of years you’ll need to draw from them. Moreover, an active income during early retirement stages can offer protection against inflation’s erosive effects. While not everyone may want or be able to commit to full-time work, part-time roles can also yield some advantages, offering a mix of financial stability and work-life balance.

6. Re-evaluate Your Housing Options

As you confront the challenges of inflation, it becomes essential to scrutinize every significant expense.

For most retirees, housing consistently stands out as the biggest monthly expense. Downsizing can not only reduce ongoing costs but can potentially free up equity to bolster your retirement savings. Relocating to more affordable regions or even states can also make a vast difference in your monthly budget, particularly when considering areas with lower property taxes or utility costs.

Inflation, though a persistent challenge, isn't insurmountable for retirees. Retirement should be a time of enjoyment and relative peace, free from constant financial anxiety. With careful planning and informed decisions, you can achieve and maintain the retirement lifestyle you’ve worked so hard for. 

If you have concerns about your retirement or need a retirement plan, schedule a no-cost, no-obligation talk with an Advance Capital Management financial adviser today.

Ryan Theisen, CFP®

Ryan is a financial adviser committed to helping people feel confident and secure in their financial lives and future. Working closely with clients, he incorporates all elements of their lives into personalized financial plans, including investment portfolio advice, tax strategies and saving for college. He is a CERTIFIED FINANCIAL PLANNER™ professional.