Higher prices can sting retirees harder than others for a number of
reasons, but there are a few specific types of investments that can
help ease the pain.
Inflation hurts everyone. It seems to reach every sector, product, and
business in one way or another, whether it raises the cost of heating
your home, lunches, or road trips. But if you’re a retiree, you may be
particularly worried about inflation because your spending habits and
income sources might be disproportionately exposed to inflation. This
means that changes to the dollar’s purchasing power may have a
considerable impact on your ability to cover costs of living and
maintain your quality of life.
1. Why Inflation Can Hurt Retirees Disproportionately
Inflation affects people differently, and there are many who may not
feel the effects of inflation as much as others. But retirees tend to
spend larger portions of their income on items highly affected by
inflation. You may spend a large part of your income on housing, food,
gas, and health care, all of which are seeing the full effect of
inflation. In addition, inflation hurts those who are living off their
savings and have limited market exposure that could otherwise provide
higher yields. Retirees are much more likely to be dependent on their
savings than a working person, who may receive cost of living
increases in their salary or consistent raises.
As a retiree, when markets are volatile and inflation is at your door,
the task of making your money last for the rest of your life can seem
daunting. In that respect, inflation is the silent killer of
retirement planning. To put it in perspective, there is a commonly
used calculation that is used to determine how inflation may affect
your money. The rule of 72 is a simple calculation used to assess the
effects of inflation on an individual’s assets over time – it goes
like this: Divide 72 by the inflation rate, and the result is how many
years of that inflation rate it would take for the value of your money
The recent rise of inflation leaves many retirees with difficult
decisions on how to protect their retirement savings while covering
their costs of living. For example, if you’re exposed to markets,
you’ve seen your portfolio fluctuate in value and may suffer what’s
known as “sequence of returns risk,” where you’ve essentially sold
your holdings at market lows, leaving less for an eventual
bounce-back. On the other hand, if you’ve played it safe and held your
savings in bank accounts yielding little to no interest, you’re
looking at high rates of erosion from inflation.
2. The Cost of Inflation
Retirees’ sources of income tend to be vulnerable to large inflation
spikes. Employees can at least make the case for inflation-based
raises, but retirees don’t have that option. If you’re a retiree, most
of your income is likely either tied to markets or is in fixed income,
two sources that are highly affected by inflation.
Pensions are a mainstay of retirement income for many. But this source
of income is struggling to match pace with inflation. Most private
pensions don’t offer cost of living adjustments, or COLAs, which means
that if you’re a retiree relying on pension income, you’ll receive the
same payments regardless of their diminishing value.
While Social Security does offer COLAs, the last increase was 5.9%,
which falls short of the 8% to 9% increase in prices we’ve seen over
the past 12 months, according to the CPI. Because of this, retirees
relying on Social Security could see insufficient income for the rest
Retirees often turn to their savings to get them through retirement.
But when inflation occurs, the purchasing power of your savings
diminishes, leaving you to withdraw larger amounts of savings to cover
your costs of living, effectively shrinking the lifespan of your
retirement savings. Similarly, many retirees also utilize certificates
of deposits (CDs), which lock up their funds for a fixed amount of
time in exchange for interest payments. Many turn to CDs as a safe,
market-neutral investment, but some CD arrangements can last many
years, tying up funds you may need to get you through this
inflationary period and offering fixed rates that don’t match
inflation. Plus, withdrawing these funds prematurely can leave you
paying hefty penalty fees.
But on the other hand, inflationary periods can sometimes coincide
with market volatility and downturns. The S&P 500 saw roughly a 20%
decline from Jan. 3, 2022, to July 1, 2022. If you were relying on
IRA distributions within that period, they may have left you taking
larger distributions when markets were at relative lows, meaning you
withdrew a larger percentage of your portfolio. This phenomenon, known
as sequence of returns risk, leaves less of your principal amount to
benefit from an eventual market rebound, ultimately shortening the
lifespan of your IRA.
Ensuring that your income keeps pace with inflation is a must. But
it’s also important to consider whether inflation will mean paying
more in taxes. If you’ve opted for inflation-protected securities that
yield you higher income, more income means more taxes, and in some
cases, a higher tax bracket. Unfortunately, tax brackets don’t adjust
in real-time, so there may be a period in which your income is taxed
at higher rates, despite it covering less of your expenses. Paying
more in taxes can be another hidden cost of inflation.
3. Inflation Hedges to Protect Yourself
As mentioned, inflation-protected securities can be a way to keep your
income on pace with inflation. Treasury Inflation-Protected
Securities, commonly known as TIPS, offer an interest distribution
rate that keeps pace with the CPI inflation rates. This investment
vehicle has helped retirees mitigate inflation and maintain their
quality of life through retirement without worrying about outliving
However, inflation-protected bonds aren’t for everyone. If you seek
wealth preservation as opposed to increased income, there are other
asset strategies that will achieve those goals without income taxes.
Consider including in your portfolio certain stocks and sectors
related to precious metals, mining, commodities, and commodity
production, such as food, oil, and gas. Holding your assets in these
sectors has historically provided wealth protection without increased
taxable income through inflationary periods.
Annuities, an insurance product for retirement savings, are another
option that can provide you with inflation protection without
sacrificing market exposure or sequence of returns risk. Annuities are
often customizable based on what your personal risks are as well as
what you’re concerned about in the market.
The Bottom Line
Retirees and their savings face a tough road ahead due to inflation.
Income sources for retirees are largely inflation-exposed, and their
spending habits tend to be on products and services impacted by
inflation. But there are plenty of strategies out there that can keep
your retirement on track, whether you’re looking to protect your
wealth from the erosion of inflation or increase your income to keep
pace with it.
Investing in inflation-protected securities, asset sectors that are
historically inflation-resistant, and financial insurance products,
such as annuities, are all potential strategies that could help you
weather the storm of inflation.