3 Ways to Plan for Inflation in Retirement

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.

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%.

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

• Inflation indexed immediate annuities

Medium-Risk Investments

• Inflation Protected Bond Funds
• Floating Rate Funds

Aggressive Investments

• Dividend Paying Stock Index Funds
• Real Estate/Real Estate Funds

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.

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.