How to Hedge Against Inflation in Retirement

Protecting your retirement savings from inflation requires careful, solid strategies that let you respond quickly and deliberately to rising interest rates. Diversifying your retirement investments and working with a professional financial advisor can help you stretch your retirement money to cover the effects of inflation.

Written by
Terry Turner
Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).
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Financially Reviewed By
Stephen Kates, CFP®
Stephen Kates, CFP®
Principal Financial Analyst for RetireGuide.com
Stephen Kates is a Certified Financial Planner™ professional and personal finance expert with over a decade of experience working with individuals and families who need help with their finances. With experience as a financial advisor for two of the largest financial firms in the country, Stephen has worked with hundreds of clients to build comprehensive financial plans to grow and protect their wealth.
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Published: May 31, 2022
Updated: May 23, 2023
8 min read time
This page features 17 Cited Research Articles

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How Can Inflation Affect My Retirement?

Retirement and inflation can be a dangerous combination. Over time, even relatively low inflation rates can eat away at your retirement savings.

The United States Federal Reserve attempts to keep inflation at just 2%. But the 12-month inflation rate in the United States reached 8.5% in March 2022, according to market and consumer data company Statista.

Even the relatively low levels of inflation experienced in the two decades before the COVID-19 pandemic could have a significant impact on your retirement savings. For example, if you were living on $60,000 a year in 2000, you would have needed $91,747 a year in 2020 just to have the same buying power you had in 2000, according to the inflation calculator from the U.S. Bureau of Labor Statistics.

And just a 3% inflation rate over the next 20 years would mean you’d need more than $108,000 per year to have as much buying power then as $60,000 per year can buy you now.

What Fuels Inflation?

Supply Chain Disruptions
Rising Energy Costs
Worker Shortages
Increased Consumer Spending
Government Monetary Policy

Social Security plays an important role in many people’s retirement finances. The benefits are evaluated each year and are usually adjusted based on an annual cost-of-living adjustment (COLA) to keep up with inflation. But this adjustment can occur after a year of rising costs — so you may feel the pinch of a higher cost of living many months before you actually benefit from the annual adjustment.

During periods of inflation, your retirement savings plans — such as 401(k) plans and IRAs — may require more watching, monitoring and adjusting on your part.

Ways to Hedge Against Inflation in Retirement

Inflation is one of the biggest risks in retirement. Several different strategies can help you hedge against inflation in retirement. These strategies may focus on stretching your fixed retirement income to cover rising prices, or they may involve adjusting your retirement account investments to keep up with the rising cost of living.

Diversify Your Retirement Savings

Diversification can protect your retirement savings while hedging against inflation.

Instead of relying on one retirement fund, this strategy involves diversifying your savings through different investments to guard against risk — including the risk of inflation.

For years, financial advisors suggested a 60/40 retirement savings strategy — 60% of your 401(k) or IRA contributions should be in stocks, and the other 40% should be invested in bonds. While the returns were often significant prior to the pandemic, inflation could erode these gains in the future.

Inflation is a major factor in any retirement planning calculation. Professional financial planners use sophisticated software to estimate how inflation may affect your bottom line in retirement. If you work with a financial advisor, be sure you have a clear understanding of how the advisor is calculating inflation rates.

Adjust Your Yearly Spending Budget for Retirement

Plan now for a higher inflation rate when you get to retirement.

If your retirement savings calculations relied on the low 2% to 2.5% inflation rate of the decades prior to the pandemic, you may want to consider raising your inflation rate estimations to 4% or 5% in retirement.

For example, if you were planning to retire with $60,000 in annual retirement income, a 5% inflation rate would mean you’ll need a $3,000 per year raise starting in your second year of retirement in order to maintain your buying power from the first year of your retirement.

Save Money on Health Care Costs

Typically, health care costs will be your single biggest retirement expense. The average couple retiring at age 65 will need $285,000 to cover their health costs in retirement, according to a 2019 study by Fidelity Investments. Note that this is a total over the entirety of the average retirement, but does not include costs such as long-term care or general elder care.

Premiums for Medicare plans will account for 76% to 82% of your health care costs in retirement, according to a 2021 report from T. Rowe Price.
If you retire before you’re eligible for Medicare at age 65, the cost of private insurance can add even more expenses. Additionally, fewer employers are offering health insurance for retirees.

You might prepare for any gap in medical coverage with a health savings account (HSA). These types of savings accounts are offered with high-deductible health insurance plans and let you sock away money for medical bills. You can continue to use the money in your HSA after you go on Medicare, but you will no longer be able to contribute to an HSA once you enroll in Medicare. You can also, however, explore a Medicare supplemental insurance (Medigap) plan or a Medicare Advantage plan to fill coverage gaps left by Original Medicare.

Additional ways to save money on health care costs include negotiating payment plans with health care providers and enrolling in prescription drug discount programs such as GoodRx to save on prescription medications.

Pay Off Debts

Americans are retiring with credit card debt, mortgages and even student loan debt that can create a significant strain on retirement income. Once you retire, every dollar you spend to pay down your debt is a dollar taken out of your retirement savings.

Having an adjustable-rate mortgage at the time you retire can be especially bad in times of high inflation because your mortgage rate will increase.

Prioritize having your high-interest debts paid off before you retire, if at all possible.

Work Longer

In the end, you may need to work longer than you planned to before you’re able to retire. Extending your working years can keep your income stream flowing and prevent you from having to tap into as much of your retirement savings.

While you may not need to keep up the daily grind, you could consider stepping down to part-time work.

You may even want to consider a different line of work. Learning a new job in a different industry or sector is a learning experience that can help keep your mind young.

Investment Products to Help Hedge Against Inflation

If you’ve gotten comfortable with low inflation rates after the Great Recession, you may want to take a closer look at your stocks, bonds and other investments during periods of higher inflation.

Stocks have historically outperformed inflation in the long run, even though inflation tends to make investors nervous and drives down stock prices in the short term.

You may want to consider investments with guaranteed returns — such as annuities or other life insurance products — as well as products that may provide adjustments for future inflation.

Annuities

Certain types of annuities can provide a hedge against inflation.

Annuities That May Protect Against Inflation

Inflation-protected annuity (IPA): An inflation-adjusted annuity is a type of annuity that guarantees a rate of return at or above the inflation rate. Effectively, it’s an annuity with a built-in COLA — a cost-of-living adjustment. Payments are adjusted to reflect the consumer price index (CPI) in the United States. IPAs tend to have a lower payout than other annuities. Even though they are indexed to the inflation rate, IPAs typically have a cap — or maximum annual rate — on how much they will pay.
Fixed-indexed annuities: Fixed-indexed annuities base their rate of return on the performance of a stock market index such as the Standard & Poor’s 500 index (S&P 500). The rate of return of stock market indexes typically outperforms the rate of inflation, so the idea is that a fixed-indexed annuity should outpace inflation.

In addition, annuities may offer higher rates during times of rising inflation. As the Fed raises interest rates to combat inflation, the rates for annuities also rise.

Bonds

Typically, bonds suffer in times of rising inflation, as bonds usually have a fixed rate of return. When inflation rises, it erodes the purchasing power of the future payout on the bond. However, there are some exceptions.

Bonds and Inflation

I Bonds: This type of Treasury bond pays both a fixed interest rate and another variable rate based on inflation or the CPI. The variable rate is adjusted each May and November. You can cash out I bonds after just 12 months.
Treasury Inflation-Protected Securities (TIPS): TIPS are federally issued bonds with a fixed interest rate that may match or beat the inflation rate. The value of the bond may rise or fall based on the CPI, but you never receive less than you paid for the initial investment.
Convertible bonds: Convertible bonds combine certain qualities of both stocks and bonds. You purchase them as bonds, but you can convert a certain number of them into stocks. Your ability to do this varies based on the terms of the bond purchase. Purchasing convertible bonds during periods of low inflation and converting them to better performing stocks when inflation rises may give you a better return on your investment.

High-Dividend Stocks, Mutual Funds and ETFs

Additional types of investments may also outperform inflation.

Other Investments That May Outperform Inflation

High-dividend stocks: Companies that pay higher dividends on their stocks also tend to have business models with built-in defenses against inflation and the cyclical nature of other market forces. Rising interest rates aimed at battling inflation also bolster the stock value of large banks that benefit from higher interest rates.
Mutual funds: Mutual funds trade in diversified holdings, which helps reduce risk for investors by investing in a wide variety of assets. Ideally, this can allow the fund to survive stock market swings and keep pace with — or even outperform — inflation.
Inflation-resistant exchange-traded funds (ETFs): An ETF is a security that works like a mutual fund. You can buy and trade ETFs on a stock exchange just like a regular stock. Inflation-resistant ETFs feature stocks such as real estate, transportation and mining interests that tend to benefit from inflation.

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Last Modified: May 23, 2023

Terry Turner Senior Financial Writer and Financial Wellness Facilitator

Association for Financial Counseling & Planning Education (AFCPE®) member
Holds six Health Literacy certificates from the CDC
Emmy® Award winner

Financially Reviewed By

Stephen Kates, CFP® Principal Financial Analyst for RetireGuide.com

17 Cited Research Articles

Duggan, W. (2022, May 20). 9 Dividend Stocks to Buy as Inflation Protection. Retrieved from https://money.usnews.com/investing/stock-market-news/slideshows/dividend-stocks-to-buy-as-inflation-protection
Statista. (2022, May). Monthly 12-Month Inflation Rate in the United States from April 2021 to April 2022. Retrieved from https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/
Gravier, E. (2022, April 7). Here’s Where Experts Recommend You Should Put Your Money During an Inflation Surge. Retrieved from https://www.cnbc.com/select/where-to-put-your-money-during-inflation-surge/
Kinsey, D. (2022, April 2). Will Inflation Derail Your Retirement Plan? Retrieved from https://www.kiplinger.com/retirement/604487/will-inflation-derail-your-retirement-plan
Christian, R. (2022, March 24). How to Protect Your Retirement Savings as Inflation Soars. Retrieved from https://www.tampabay.com/news/business/2022/03/24/how-to-protect-your-retirement-savings-as-inflation-soars/
Cain, S.L. (2022, March 17). Here’s the Stuff About Bonds You Were Always Too Bored to Learn About. Inflation Means You Have To. Retrieved from https://fortune.com/2022/03/17/heres-the-stuff-about-bonds-you-were-always-too-bored-to-learn-about-inflation-means-you-have-to/
Rodeck, D. (2022, March 16). Build an Inflation Hedge Around Retirement. Retrieved from https://www.kiplinger.com/retirement/604402/build-an-inflation-hedge-around-retirement
Meyers, J. (2022, March 11). Inflation ETFs May Start Making You Money. Here’s How, According to One Portfolio Manager. Retrieved from https://www.cnbc.com/2022/03/11/top-inflation-etf-portfolio-manager-breaks-down-strategy-for-1b-fund.html
Thune, K. (2022, February 10). 5 Best Mutual Funds to Fight Inflation. Retrieved from https://www.kiplinger.com/investing/mutual-funds/602983/5-best-mutual-funds-to-fight-inflation
Hallez, E. (2022, January 24). What Inflation Could Mean for Annuities. Retrieved from https://www.investmentnews.com/inflation-annuities-215266
Donti, J. (2021, October 3). How Big of a Threat Does Inflation Pose to Your Retirement? Retrieved from https://www.kiplinger.com/retirement/603547/how-big-of-a-threat-does-inflation-pose-to-your-retirement
Fidelity Investments. (2021, August 31). How to Plan for Rising Health Care Costs. Retrieved from https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
Banerjee, S. (2021, March). A New Way to Calculate Retirement Health Care Costs. Retrieved from https://www.troweprice.com/content/dam/fai/Collections/DC%20Resources/a-new-way-to-calculate-retirement-health-care-costs/CalculateRetirementHealthCareCosts.pdf
Thurston, A. (2020, May 12). Retirement Savings Hit by COVID-19? Here’s What to Do Next. Retrieved from https://www.bu.edu/questrom/2020/05/12/retirement-savings-hit-by-covid-19-heres-what-to-do-next/
O’Brien, E. (2019, April 2). Here's the Shocking Amount a Couple Retiring Today Will Spend on Health Care. Retrieved from https://money.com/health-care-in-retirement-average-costs/
Mahaney, J. (2017, July 31). Hedging Inflation in Retirement. Retrieved from https://pensionresearchcouncil.wharton.upenn.edu/blog/hedging-inflation-retirement/
U.S. Bureau of Labor Statistics. (n.d.). CPI Inflation Calculator. Retrieved from https://data.bls.gov/cgi-bin/cpicalc.pl