Key Points
No matter how carefully you plan for retirement, unexpected challenges can arise. The stock market could decline suddenly. Healthcare expenses may climb. You might even require long-term care at some point.
However, one hurdle you should plan for is inflation. Over time, the cost of living tends to rise, and without preparation, you could steadily lose purchasing power. These two adjustments to your retirement strategy can help you stay ahead.
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1. Choose your investments strategically
It’s common for retirees to scale back their stock holdings to reduce portfolio risk. While some degree of de-risking is reasonable, completely exiting the stock market is inadvisable. Doing so could cause your portfolio to fall behind inflation, eroding your purchasing power and putting your savings in jeopardy.
If you’re uncomfortable holding individual stocks in retirement, consider investing in an S&P 500 exchange-traded fund (ETF). This provides broad market exposure with minimal effort. Alternatively, dividend-focused ETFs can offer a reliable stream of income.
Stocks aren’t the only way to outpace inflation, either. Treasury Inflation-Protected Securities (TIPS) are another strong option.
TIPS are government bonds specifically designed to shield your wealth from rising prices. Their principal adjusts upward with inflation, helping you maintain pace with increasing costs.
I bonds offer a different mechanism but similar protection. Their interest rate is tied directly to inflation, meaning higher prices translate into higher returns for you.
2. Give your Social Security benefits a boost
While your savings could eventually be depleted, Social Security guarantees a monthly benefit for life. Increasing that benefit by delaying your claim is an effective way to enhance your inflation protection.
Each year you postpone your Social Security claim beyond full retirement age raises your monthly benefit by 8%, up until age 70. Because these benefits are also eligible for annual cost-of-living adjustments, starting with a larger base means each annual increase will put more money in your pocket — making it easier to manage rising expenses.
Inflation is unavoidable in retirement. Even at moderate levels, having a plan to counteract it is essential. These two steps can put you in a stronger position to manage your costs over the years and avoid prolonged financial strain.
