7 Ways to Hedge Against Inflation During Retirement

7 Ways to Hedge Against Inflation During Retirement

Inflation has been relatively low for the last few years, although this trend appears to be coming to an end. When approaching retirement, some individuals might not think critically about inflation, but small increases in living costs can have a significant impact on your retirement income. Today, $1 million might be enough for some households to retire, but due to inflation, this might not hold true in the future. Therefore, it’s beneficial for people to examine strategies to safeguard against inflation that will help their money to last longer once they retire. Some practices that can help to mitigate the risk of inflation include the following:

1. Invest in real estate

In general, real estate prices rise with inflation. People who own their homes as they head into retirement already have some hedge against inflation. Another option is to purchase real estate because you can raise the rent alongside inflation, which can provide you with even more income. However, you should keep in mind that being a landlord involves a lot of work, and some individuals might not want this responsibility during retirement. You can hire a management company to handle your property, but this will cut into your profits. Alternatively, individuals can consider a real estate investment trust (REIT), which has some of the benefits of real estate investment without the drawbacks of being a landlord.

real estate

2. Purchase Treasury Inflation-Protected Securities

As safe investments, bonds and annuities have a beneficial place in an investment portfolio. However, it is important to understand that most bonds will lose value when inflation increases. One exception to this is a Treasury Inflation-Protected Security (TIPS). This bond keeps up with inflation through adjustments to its principal according to shifts in the Consumer Price Index (CPI), which measures average price changes over time for goods and services purchased by consumers. TIPS pay interest exempt from local and state taxes and ensure that the returned principal upon maturity is the adjusted amount or equivalent to the initial investment, whichever is greater.

3. Delay Social Security payments

Not everyone is in a position to delay their Social Security payments once they retire. However, if you have enough money saved to live off of without claiming Social Security, it can be beneficial to wait until your payments reach their maximum value. The reason is because Social Security payments are protected against inflation. The payments are subject to automatic cost-of-living adjustments that are designed to counter the effects of inflation. After you attain the highest payment possible, the percentage adjustments will increase over time.

4. Stay invested in stocks

As most people move closer to retirement, they become more risk averse. Individuals who invest in stocks might become more inclined to reduce the number of stocks in their portfolio. After all, no one wants to jeopardize their nest egg immediately before they retire. However, stocks often keep up with inflation. In particular, commodity stocks such as oil and gold tend to perform well during times of heavy inflation. Therefore, keeping at least a few more stocks than you initially intended to could help to sufficiently increase your returns in order to deal with inflation.


5. Embrace a green lifestyle

One of the ways that retirees can protect themselves from inflation is to stock up on necessary, durable items when prices are low. For instance, making a home energy-efficient can help homeowners to safeguard themselves against rising energy prices. Retirees can also start a garden to reduce the amount of produce that they need to purchase. Moreover, people with the means and flexibility to be selective about where they want to live can choose a community that is walkable or bikeable for daily commutes to avoid relying on increased fuel costs for transportation.

6. Secure long-term care insurance

The connection between long-term care insurance and protection against inflation might not be immediately apparent. However, inflation leads to increased healthcare costs, which often grow at a rate that outpaces inflation. If you do not have insurance and need more care later in life, the cost could be significant. Investing in long-term care insurance, if possible, can help you to safeguard against this by securing extra financial assistance for when you need it.

7. Consider reducing your expenses

Another way that households can protect themselves from inflation is to plan on reducing their expenses over time. For example, a couple may require two cars to maintain their current lifestyle, but later on it might be more practical for them to have only one. A plan for downsizing can help you to control costs and lower the pressure caused by inflation. Additionally, you may want to do a lot of traveling initially, but then decide to scale back over time. Although many individuals do not like to think about the possibility of curtailing their lifestyles, planning for potential cutbacks can help them to prepare for the possibility of increased costs and reduce the possibility of last-minute compromises.