Planning for Inflation During Retirement

Planning For Retirement

Inflation is something that impacts not just those who are currently working but also retired Baby Boomers. Inflation rears its ugly head regardless of the economic situation and time. This can have a huge impact on those who are living off their retirement money or savings. The key here is to know how to mitigate the impact of inflation and to counter the inevitable rise of prices. It is best to make sure purchasing power will not be eroded over time.

Seniors Need To Plan For Inflation

A survey by a league of senior citizens said the purchasing power of seniors has been eroded by 31 percent since 2000. Seniors, in this case, lost almost a third of their purchasing power. There is no impending improvement in the spending power of Social Security benefits. This is despite the streak of lower than usual inflation. To put things in perspective, seniors can only afford $69 today, which used to be $100 back in 2000.

Investing Upon Retirement

In an ideal world, one can ride inflation even as a retiree. The problem is that the market has been slow in producing financial products to help shield against inflation problems. The alternative is to hedge headline inflation, instead of golden-years retiree inflation.

The key here is to save more. The alternative is to keep working beyond retirement. The latter is a strategy that is very unlikely to happen, or the worse that could happen. Taking more risks on your portfolio may reap dividends. But, at the same time it is tantamount to getting exposed to dangers. When bonds or stocks do poorly in inflation environments, there could be trouble brewing. Some financial experts say to take great care when taking a huge risk since it is the future that is at stake here.


It might be tempting to invest retirement money on low-risk bonds. This may happen when a person nears retirement age. Yet, too many people focus on bonds. Since bonds are often less risky, they offer fewer returns. 

A bond may have a return rate of six percent, but if inflation is at three percent—what a person can effectively be getting is just three percent, which is a pretty low return on investment.


By the time the senior retires, he is most likely to think about investing right away. This is because he wants to earn returns that are high enough to be able to fund his daily spending needs. But while investing, a senior must make sure that he has protection against inflation. This is crucial to ensure that his portfolio and his overall lifestyle during retirement won’t have to suffer from too much blow from inflation. 

This is the reason why some seniors are considering the thought of investing on stocks. Although there isn’t any recommended specific amount how much should they invest on stocks.But, a lot of financial advisers suggest that it shouldn’t be more than 60 percent.


In an annuity, seniors are guaranteed of lifetime income that also raises its payments along with inflation. However even if an annuity provides sure income as it keeps pace with the inflation rate, not many seniors choose this route. One reason for this is that the initial payment provided by inflation-adjusted annuity is so much lower compared to what seniors may get from a traditional immediate annuity. 

With traditional immediate annuity, a senior could possibly get $540 each month for the rest of his retirement years. On the other hand, an inflation-adjusted annuity would only be providing as much as $375 per month, for life. However, this amount of $375 may also increase along with the inflation rate. With these differences in the amount of monthly income that they get, seniors still prefer the bigger monthly fixed payment. 

TIPS (Treasury Inflation Protected Securities)

To make sure that your monthly income is enough to cope with inflation in your retirement years, you may also choose to invest a part of your bond holdings on TIPS. In TIPS, seniors will have payouts that can track inflation. 

TIPS are designed in a way that investors such as retirees are protected against inflation. This is made possible due to the fact that the returns are tied to what we call as Consumer Price Index. This is so beneficial especially to seniors who are living on fixed income in their retirement years. 

For example, if you choose to invest your $100,000 and the rate of inflation is 4 percent, then your principal balance will become $104,000 the following year. Once your investment reaches its maturity date, seniors can now get back either the original principal amount or the amount that’s already adjusted according to the inflation rate, whichever is the higher amount. 

TIPS also offers interest income which is being paid out every six months. Investors of TIPS won’t have to pay for local and state taxes. However, they are still required by law to pay federal taxes on what they earned from TIPS. 

Note that if you are not financially prepared for the inflation rate, you are setting yourself up for great disappointment in your retirement years. History has it that inflation rate rises at an average of 3 percent or more. So, whatever it is that you save or invest on, always keep in mind the inflation rate. 

The key here is to bunch some riskier investment with the portfolio. Invest in stocks, retirement plans, and other ways to raise money for retirement. It is important to create more money that can overcome the inevitable rising cost of living in the future.

Seniors have plenty in their plates. They are supposed to invest not just in the future, but enough. Another thing, a senior’s lifestyle will also be impacted by inflation. The more extravagant a senior’s lifestyle, the more that it will have an impact on the cost of living. It is best to keep one’s lifestyle as simple as possible.

Other Tips to Help Reduce the Impact of Inflation on Your Retirement Money

Don’t be too conservative.

Being too conservative would make you shy away from any investment opportunities. But, with the help of a financial adviser, seniors’s investments must be diversified. They must take into consideration the senior’s risk tolerance and income needs. Of course, the senior’s age also needs to be considered. Know that the greatest risk that seniors may face is the risk of outliving their retirement savings. 

Be wise when making pension decisions.

Seniors covered by pension plans are often asked about whether they want to receive their benefits in a form of monthly payment or as a lump sum amount. Whatever you choose, make sure that it perfectly suits your situation. Most corporate pension plans do not offer an increase in cost of living. In other words, they do not take into consideration the inflation rate. This is why the real value of their monthly pension will be lost due to inflation rate. However, some public and municipal pension plans do offer adjustments regarding cost of living. But, still there is no guarantee that such increase will continue to keep pace with the rising inflation rate. 

On the other hand, seniors may choose to have their pension in a lump sum amount  and then roll this into an IRA. They may ask help from a professional financial advisor to ensure they’re doing everything right. 

Keep in mind that a properly invested retirement portfolio will not just help spare you from the adverse impacts of inflation arte. It will also help guarantee that you will be earning enough to be able to achieve financial stability in you retirement. 

Always factor in healthcare costs in your retirement money. 

Unfortunately, health care costs have been proven to increase faster than the overall increase rate of inflation. This is why it is very important that seniors must include in their retirement savings the budget for healthcare costs. Although Medicare does help seniors age 65 and above, it isn’t enough to cover all costs. 

If your health insurance offers a high deductible plan plus an added access to HSA, grab this chance. HSA is a special type of financial account that helps you pay your medical expenses. You can use it to cover prescription drugs, copays and deductibles. All these without tax obligations. 

Find a way to reduce your fixed expenses.

Most of the time, the seniors’ mortgage would usually account for most of their fixed expenses in retirement. But, this may not be a problem for as long as you have more than enough nest egg. Paying hefty monthly mortgage will not also be an issue if you are receiving monthly pension. But, if you think your mortgage is somehow difficult to maintain once you retire, think about downsizing. 

This way, you can ensure that your monthly fixed expenses in retirement are so affordable. Other fixed expenses that deserve a much more careful look are your cable channels, cell phone plans or your second car. Always keep in mind that once you retire, unplanned and unexpected expenses may arise. These things could significantly impact your monthly cost of living.

Think about your long-term care needs.

If you don’t plan for your long-term care needs, chances are most of your retirement savings will be spent for it. The best way to offset some of the costs of long-term care is to enroll in long-term care insurance. Long term care insurance is expensive but it will become even more expensive as you age. Long-term care insurance is most appropriate for seniors who fall in the middle in terms of net worth. This is because the rich finds it easier to pay for their long-term care. And, those who have very low net worth will just rely on what Medicaid provides them. 

Go easy on your withdrawals.

This is a must especially when you’re still in the early years of your retirement. Minimize your withdrawals as much as you can. As much as possible, keep your withdrawals within the minimum amount. This is to ensure you do not run out of funds later in life. Depending on your health status, the costs of medical and health care will increase during the later part of your retirement years. When you minimize your withdrawals you can be assured that you still have enough when you need it the most in the later years. 

Work in retirement.

This is if you are healthy enough to do so. You may choose to work part time or full time even after you’ve retired. This helps you become better protected against inflation. The money you earn will surely add up to your spendable cash flow. So, you do not have to rely solely on withdrawals from your savings. 

Be prepared for the unexpected.

Retirement years may bring a lot of surprises. Some of these are good while some are not-so-good. Make sure you can cope well with these unexpected events. Being prepared will greatly spare you from shock and anxiety. It will also help make your retirement years more enjoyable than stressful. So, watch out on your withdrawals. Learn how to manage well all your investments. Always monitor your spending. Most of all, do everything to keep yourself healthy. A hefty retirement savings account cannot be enjoyed if you’re too sick to even just spend it. 

It is true that most retirees don’t have to worry about sending their kids to school. And, they don’t have to feed a whole family. But, they still need to set aside enough budget for food. They also need to have enough money for medical bills and housing costs. Add in the fact that the cost of living is projected to increase by 16 percent in the next five years. And, over the next ten years, this rate may go up as high as 34.5 percent. This is why seniors must pay attention to their retirement savings and do all means to improve their financial future.