Inflation in Retirement- Higher and Higher - American Financial Management Group | Philadelphia Financial Planner

Inflation in Retirement- Higher and Higher

As much as our clients do, we enjoy exploring the optimistic portions of retirement income planning. It’s exciting to think about the possibilities ahead. With minimal hyperbole, we describe entering retirement as the second biggest opportunity (after leaving school/entering adulthood) to define your future. Regretfully, part of the planning process necessitates addressing the possible risks we could confront in retirement. One of them being inflation. And unlike the way Jackie Wilson was lifted higher & higher, prices going higher & higher is not a good thing.

We have identified 18 financial risks you may face in retirement. We can divide these 18 risks into one of three categories: risks you can control, risks you can influence, and risks you have no control over. Unfortunately, inflation is one of the risks you cannot control and can be a significant problem.  

Most of us either remember the inflation of the 1970s and early 1980s or at least have heard stories about the financial damage it wrought. Compared to today, the inflation rate back then was much larger, reaching 13.5% in 1980. If you were collecting a fixed income, such as a pension or an annuity, going into that period, you experienced a considerable drop in your spending ability.

However, we do not need to live through the 1970s to have an issue. If starting today, prices go up just 3.0% per year; then, in 24 years, things cost twice as much as they do now. Moreover, when we say “inflation,” we usually are talking about the Consumer Price Index (CPI), which is tracked by the US Bureau of Labor Statistics. Going further into the weeds, the BLS calculates the CPI by averaging the change in prices of various goods and services that people buy. Depending on your specific spending habits, the impact of inflation you face could be higher or lower than your fellow Americans.  

There is good news too. Inflation will hurt your purchasing power but will generally help the assets you own, especially stocks and real estate (i.e., your home). This asset inflation means the growth of your investments should be able, at least partially, to offset the impact of inflation on your expenses. However inflation doesn’t help all of your assets. Bonds and other “fixed” investments (investments that pay a pre-determined, or fixed, return) can lose value if inflation is higher than expected.  

OK, so inflation is good for some things and bad for others. What can we do to minimize the mischief inflation may cause? There are several tools you can use, but specifically, there are three we want to address here. Keep in mind that because your situation is unique, these tools may not be best for you. Keep in mind that we are educating, not advising in this article.

When it comes to protecting against the various “what-ifs” in retirement, Social Security always seems to be an essential tool, regardless of the risk (until we talk about Public Policy risk, anyway). The Social Security program adjusts for inflation in two ways. 

  1. The annual Cost of Living Adjustment (COLA) announcement that impacts next year’s (2021) benefit checks. 
  2. Your earnings history. Oversimplified, your annual earnings before age 60 are adjusted to account for the general increase in wages over your working years. 

As with many calculations associated with Social Security, the actual math is more complicated, but the simplified version we just described is sufficient for our conversation.  

Similarly, there is no guarantee that wages will keep up with inflation so that the earnings history adjustment may lag actual inflation too. All that said, a guaranteed income stream outside of your assets, that is adjusted for inflation is an excellent tool to have.

There are a few Investment Selections you can use that normally move with inflation. As mentioned above, stocks & real estate respond favorably to inflation. Many investors use Treasury Inflation-Protected Securities (TIPS) to help protect against inflation. Again oversimplifying, TIPS pay semi-annual interest whose payments will rise or fall based on the CPI. You could use TIPS as a portion of your investment portfolio, or you could use them as a bond ladder (a topic for another post). The last option we will cover here are annuities with an inflation-protection rider. The rider does have a cost, so this annuity starts paying a lower rate than an unadjusted annuity, however over time, the payments will increase. You must read the fine print though, most of these annuities will have a limit on how high the adjustment can be each year; your income may not keep up with inflation in some years.

The last tool for discussion, one not frequently thought of, but in talking with our clients, we find it can be useful: prepaying expenses. Succinctly put, typically, once you pay an expense, then any increase in price cannot hurt you. The most common example of this strategy is the prepaid funeral expense, but there are others. Are you eventually moving into a senior living community, like a 55+ housing or continuous-care community? You may be able to lock in the current pricing in exchange for particular commitments before you are ready to move. Paying off debt is a little different. Inflation is a friend of borrowers since your monthly payments are not increasing as inflation rises. But paying off debt early (for purposes of the Inflation Risk) can still help since it creates more room in your monthly budget to cover increasing costs.

Ultimately the keys to effective inflation protection are diversification and flexibility. Nobody knows if or when a risk will occur. If you attempt to protect yourself from inflation with 100% certainty, you bring in the possibility of not having the flexibility to adjust if other issues arise. Diversifying with multiple tools and strategies will provide some protection, which gives you more time to react if inflation becomes a problem for your situation.

Reach out to us to review your retirement income planning efforts. We will work with you to understand how inflation and other risks can force changes to your ideal retirement. The result is a balance between your freedom to enjoy your retirement and protecting against the inevitable “what-ifs.” Hence, you end up with your best retirement. Access our calendar here to set up a time that’s most convenient for you. 

Investment Advice offered through Private Advisor Group, LLC, a Registered Investment Advisor.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.


Kevin focuses on helping people with retirement income planning. He is concerned that too many people become overwhelmed as they shift from building their retirement savings to using their retirement savings to support their desired lifestyle. By engaging in a robust planning process, he aims to lessen the financial fears we all have after we end our careers. Learn more about Kevin

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