Five Ways to Protect Your Retirement Against Inflation

July 28, 2021

After decades of tame inflation, it spiked sharply in April, reaching 3.4% on an annualized basis. If sustained over a year, that would be more than twice the average inflation rate over the past 15 years.

Here are some ways you can protect your retirement savings:

  1. REDUCE YOUR CASH POSITION. As of May this year, money market accounts paid an average of .07%, according to Bankrate data. Some were paying close to .5%. Even the best, highest-yielding money market accounts and CDs are not even close to keeping up with the current inflation rate. Tip: Keep just enough cash to see you through emergencies, and keep the rest invested.
  2. MAINTAIN SOME STOCK MARKET EXPOSURE. Most people should reduce stock market risk as they get older. But you don’t want your stock allocation to go to zero. Over long periods of time, the stock market historically beats inflation. Today’s 65-year-olds can expect to live another 18-20 years or more, on average. Tip: Keep something invested for the long haul.
  3. CONSIDER ANNUITIES. Annuities provide a guaranteed income for you and your spouse that you cannot outlive. Tip: Consider an annuity with a cost-of-living rider, which automatically increases your income to keep pace with inflation, guaranteed. You’ll receive a lower initial payout, but you’ll have some protection against inflation risk.
  4. DELAY SOCIAL SECURITY BENEFITS. You can begin taking Social Security benefits at age 62. But if you’re in decent health, it usually makes sense to wait until your full retirement age, or even until age 70, if possible. Every year you wait increases your eventual benefit by 8%. That higher benefit also gets adjusted for inflation each year. Delaying Social Security benefits may also help you reduce or eliminate income taxes on those benefits. Tip: If you believe you’ll have a hard time waiting, consider working longer, and working with your advisor to use annuities or other income-generating assets to create a bridge income until you do begin taking Social Security.
  5. CONSIDER REAL ESTATE. Along with owning your own home, investing in real estate may help you diversify against both inflation and stock market risk. Real estate is cyclical, but the overall growth trend is strong. And even if there is a pullback in prices, it is usually short-lived. Tip: You don’t have to be a landlord to invest in real estate: It could be as simple as allocating something to a real estate investment trust fund within your 401(k).

For specific questions regarding your retirement plan, reach out to your Marsh McLennan representative for assistance.