How to Combat Inflation’s Negative Effects on Your Retirement Savings

In many ways, inflation is like aging or weight gain. It creeps up on you so gradually you don’t even notice it, but over time, it has a huge impact. Consider this: In 1990, the average home price in the United States was around $150,000, and the median household income was $55,952 per year. By 2018, the median income had climbed to $63,179, and the average home price had zoomed to around $380,000 — even after a major real estate crash in 2007.

The effects of inflation aren’t limited to salaries and home sales, either. As prices go up, the value of the dollars you already have goes down — including the dollars in your retirement portfolio.

For example, suppose you’re planning to retire in 30 years. Your current cost of living is $50,000, so you calculate that a nest egg of $1 million should see you through 20 years of retirement. You plan your retirement contributions at every age to hit this target exactly on your retirement date.

Now suppose that inflation over those 30 years is a steady 3% per year. By the time you retire, your living expenses have risen to more than $121,000 per year. At that rate, your $1 million in savings will support you for only eight years — and its purchasing power will only continue to erode over time. You’ll have to either keep working or scale your lifestyle way, way back if you don’t want to outlive your money.

To avoid this problem, you need to factor inflation into your financial planning process. Keep it in mind as you set your financial goals, and adjust the amount you save accordingly. Then, choose investments that offer the best long-term return, so your earnings will keep pace with inflation and then some.

Adjust for Inflation

There are lots of books, websites, and online calculators designed to help you figure out how much you really need to retire. Most of them use formulas that take inflation into account. For example, a retirement calculator that assumed a 3% average annual inflation rate would tell you that you should aim for $2.42 million, not $1 million, to live for 20 years in retirement starting 30 years from now in the same lifestyle you can buy for $50,000 per year today.

There’s just one problem: an adjustment of 3% per year for inflation might not actually be enough. Online retirement calculators and even human financial advisors often assume that inflation in the future will be fairly low, because that’s how it’s been for the past 20 to 30 years. As this chart from the Federal Reserve Bank of Minneapolis shows, since 1991 the inflation rate has never topped 5% once, and since 2012 it’s never even reached 3%.

However, if you look back a little farther, the picture is quite different. From 1968 through 1985, the inflation rate was consistently over 3%, often hitting double digits. In other words, low inflation today is no guarantee of low inflation 30 years from now.

Even a seemingly small change in the rate of inflation can make a big difference in the real rate of return on your investments. For instance, if your portfolio is earning 5% per year and inflation is 2%, your real rate of return is 3% — but if inflation climbs to 4%, your return drops to 1%. This, in turn, can seriously hurt your chances for a successful retirement. An analysis performed for Consumer Reports shows how a retirement portfolio earning 5% has an 85% chance of lasting you 25 years if inflation is at 2%, but only a 50% chance at 4% inflation.

Thus, when you plan for retirement, it’s safer to assume an inflation rate that’s too high than accounting for one that’s too low. Tinker with the numbers in your retirement formula and see how well your savings will hold up if inflation rises to 3%, 5%, or even 7% per year. Inflation may never reach that level in your lifetime — but if it does, it’s best to be prepared.

Step Up Savings

If your retirement calculator tells you that your earnings will hold up even at 1970s-level inflation rates, great — you don’t need to change a thing. But most Americans are not even close to hitting this target. According to the 2019 Planning & Progress Study from Northwestern Mutual, more than 20% of Americans have less than $5,000 saved for retirement, and 15% have no retirement savings at all.

If you’ve crunched the numbers and found that you’re not saving enough for retirement to support a comfortable post-inflation lifestyle, you’ll need to adjust your target number to make up the difference. Achieving this new, higher goal could mean saving more money, investing more aggressively, or both. For instance, if you’re currently saving $250 a month, you might decide to bump that amount to $500 a month or more.

Boosting your savings rate by this much can seem difficult or even impossible, especially if you’re currently living paycheck to paycheck. However, there are several ways to make it easier. For instance, you can:

  • Pay Yourself First. When you make a budget, figure out how much you want to set aside for retirement savings before you look at any of your other expenses. Deduct this amount from your earnings, and set the rest of your budget based on what’s left after you pay your future self.
  • Make Savings Automatic. If you have access to a workplace retirement plan like a 401(k) or 403(b), it’s easy to save by directing a portion of each paycheck to your plan. If you don’t, you can still automate your savings by setting up automatic withdrawals from your bank account to an investment account like Stash or M1 Finance. Or you can use a micro-investing platform the Acorns app to round up all your purchases and funnel the spare change into your investment plan.
  • Trim the Fat. Many people can find an extra $100 or more in their budget by cutting unnecessary expenses. Look at your budget to see where your money is going and where you could most easily make some cuts. For instance, you might decide to eat out less, trim your entertainment budget, find a cheaper cellphone plan, cancel your gym membership, carpool to work, or use a service like BillShark to negotiate lower rates on cable and internet bills. All that extra money can go straight into your retirement fund.
  • Cut Fixed Expenses. In some cases, it’s not the little “extra” expenses that are eating up your income; it’s the big monthly bills like rent and transportation. If you’re in this situation, you can save big bucks by finding a cheaper apartment, refinancing your mortgage, or using to find cheaper child care options.

Pro tip: If you’re investing for retirement using a 401k, IRA, or another retirement account, sign up for a free portfolio analysis from Blooom. After connecting your accounts they will make sure you’re properly diversified and have the right asset allocation set up. They will also check to make sure you’re not paying too much in fees.

Invest for the Long Term

Even if you’re putting aside plenty of money each month, you could still fall behind if your investments don’t earn enough to keep up with inflation. To make sure you hit your retirement savings goals, you need to focus on investments with a good long-term return.

Focus on Equities

Financial experts agree that the best way to earn inflation-beating yields over the long term is the stock market. According to Consumer Reports, in the years since World War II, the S&P 500 — one of the leading stock market indexes — has returned an average of 11.1% per year. The inflation rate over the same period averaged around 4%, so investing in stocks during that period would not only beat inflation but grow your money by an additional 7% per year.

Many people think of bonds as a lower-risk investment than stocks — and in many ways, that’s true. Buying a bond is essentially loaning money to a company or government, and since companies and governments usually pay their debts, there’s little risk that you’ll lose your entire investment.

However, inflation poses a risk too. If your investment doesn’t earn enough to outpace inflation, you’re effectively losing money. This is much more likely to happen with bonds than with stocks. If you buy a bond that pays 4% per year, it will keep paying just 4% per year even if inflation rises to 10% or more. Stocks, by contrast, tend to perform well when the economy is growing, which is also when inflation is most likely to occur.

Of course, stocks won’t simply yield steady, high returns year after year. The market can go down as well as up, so some years you’ll lose money. That’s why it’s useful to keep some bonds in your portfolio too; they’ll still perform well during market downturns. This becomes even more important as you get close to retirement and need to protect more of your portfolio from loss.

Even in retirement, though, it’s useful to keep some of your money in stocks. They won’t make money for you every year, but they’ll boost your return over the long term. Without them, your portfolio can be like a leaking balloon, gradually shrinking as it loses a little value to inflation every year.

Consider Dividends

To get even more bang for your investment buck, consider putting money into dividend-paying stocks. These stocks make money for you in two ways. Like other stocks, they tend to grow in value over time, so you can make money by selling them later on. But they also provide you with a steady source of passive income in the meantime — income you can either use to live on or reinvest to buy more shares.

Compared to other stocks, dividend-paying stocks do an even better job of beating inflation. That’s because the dividends they pay tend to rise as fast as inflation or even faster. If you consistently reinvest these dividends, your returns will grow as fast or faster as those of other stocks.

Like stocks themselves, dividends aren’t a guaranteed deal. As the New York Times explains in an April 2020 article, companies aren’t required to keep paying out dividends the way they have to pay interest on a bond. When money is tight, they can and do dial them back. During the Great Recession, companies in the S&P 500 cut their dividends by 29%, and the 2020 recession prompted many companies to deeply cut or suspend their dividends.

Nonetheless, over the long term, buying dividend-paying stocks and reinvesting the dividends can add up to huge gains. A 2019 white paper by WisdomTree shows this advantage by examining research performed by economist Jeremy Siegel. In his 2005 book “Future for Investors,” Siegel found that the stocks in the S&P 500 that paid the highest dividends consistently outperformed the S&P 500 index as a whole, beating its returns by more than 2 percentage points per year. Over the period from 1957 to 2019, an investor who put money into these high-yielding stocks would have earned twice as much as one who invested the same amount in the entire S&P 500 index.

Hedge Against Inflation

Stocks aren’t just a good investment to protect you from inflation; they’re a good investment, period. However, there are other investments that some people like specifically because they tend to hold their value well. Financial experts often refer to these investments as inflation hedges. Just like an evergreen hedge that fences in your property, these investments provide a barrier between you and falling dollar values.

Inflation hedges aren’t necessarily great investments when inflation is low, and you probably wouldn’t want to build a whole portfolio around them. However, putting some money into them helps ensure that when the dollar takes a dive, your whole portfolio doesn’t dive along with it.

Real Estate

One popular way to protect your money from inflation is to invest in real estate. The reason is simple: when prices and wages rise, so do rents. If you have a rental property that’s paying you $500 a month and then inflation cuts the value of that $500, you can simply bump the rent up to $525, and your tenant will probably accept the increase without complaint. After all, the other landlords in the neighborhood will be raising their rents too, so it’s not as though they have much alternative.

Moreover, the value of the property itself will also rise along with inflation, if not faster. Recall the statistics at the beginning of this article: between 1990 and 2018, the median household income rose by only 13% while the average home price in the country more than doubled over the same period. So, if you decide you’re tired of being a landlord, you can most likely sell the property for a gain that beats inflation by a tidy margin.

Of course, just like stock prices, housing prices don’t simply rise at a steady rate. For instance, if you had bought a home in 2007 and tried to sell it in 2009, you would find its value had fallen by about 14%. However, if you held onto the property for another eight years and sold in 2017, after the market recovered, you would have made a profit of 16% instead. So, like stocks, real estate is an investment that tends to pay off in the long run.

Investing in real estate protects you from inflation in another way as well. It’s often possible to buy a property with a fixed-rate mortgage, which means the payments stay the same over the life of the loan. If inflation is at a steady 3%, then you’ll make your final payment on a 30-year mortgage with dollars that have shrunk in value by nearly 60%. It’ll be like paying only $0.41 for each dollar you owe.

There are many ways to take advantage of real estate as an inflation hedge. You can buy homes and flip them, rent them out on a yearly basis, rent them out as short-term vacation properties. Or you can invest in real estate indirectly through real estate investment trusts and crowdfunding websites such as Groundfloor, which let you make a small share of another person’s mortgage loan.

Inflation-Adjusted Bonds

As noted above, bonds in general aren’t a good bet for keeping ahead of inflation. However, there’s one type of bond that’s specifically designed to address this issue. The U.S. Treasury offers two types of inflation-adjusted bonds that are guaranteed to keep up with inflation and offer a small return on top of that.

The best known type of inflation-adjusted bond is Treasury Inflation Protected Securities (TIPS). Like other bonds, TIPS pay a fixed interest rate — but their actual face value rises and falls to match inflation. When they mature, you get not the original face value but the inflation-adjusted value. (However, if there has been deflation in the meantime, you get the full face value, so you don’t risk losing money.)

For instance, say you pay $1,000 for a TIPS bond that pays 3% ($30) per year. In the first year you own it, inflation rises by 4%. If this were a normal bond, that inflation would cancel out all your interest and then some. But since it’s a TIPS bond, your bond becomes worth $1,040, and the interest on this higher value rises to $31.20. And if inflation continues to rise, your yield will continue to rise with it until the bond matures or you sell it.

The other type of inflation-adjusted Treasury bond is Series I savings bonds, or I-bonds. These pay a fixed annual rate, plus a variable rate that’s linked to the inflation rate. When you cash them in, you get the full value of the bond plus the accumulated value of all the interest it’s earned.

I-bonds nor TIPS don’t pay particularly high returns, but they are very safe investments that are guaranteed to keep up with inflation. You can buy TIPS through a bank or broker or online at TreasuryDirect. I-bonds are also available at TreasuryDirect, or you can use your federal tax refund to purchase paper I-bonds.


Commodities are physical goods that have an inherent value, such as oil, lumber, or even pork bellies, which are used to make bacon. Because people always need these goods, their prices tend to rise whenever prices in general go up, making them a useful hedge against inflation.

However, this doesn’t mean commodity prices rise at a steady, predictable rate. On the contrary, they are highly volatile, swinging up and down much faster than other investments such as stocks. Speculators try to take advantage of these price changes, buying commodities at a low price and selling them for more.

Unlike stocks, commodities aren’t investments you can simply buy and hold for long periods of time. When you buy, say, a barrel of oil, you’re promising to deliver that barrel of oil on some future date to someone who can actually use it. You hope that when that date comes, the price of the oil will be higher than the price you paid for it — but there’s no guarantee it will be.

This makes commodities a risky investment. However, you can reduce this risk by diversifying, putting money into lots of different commodities instead of just one. Rather than buying actual barrels of oil or bushels of corn, you can buy shares in commodity exchange-traded funds (ETFs) and index funds through a brokerage. These funds track the price of a single commodity, a group of commodities, or the commodities market as a whole.

Precious Metals

One specific type of commodity that many people value as an inflation hedge is precious metals such as gold or silver. What sets these metals apart from many other commodities is their scarcity. There’s only so much gold and silver in the world, and it’s hard to produce more. Thus, these commodities aren’t vulnerable to a sudden glut in supply that sends their price plummeting.

However, the real appeal of silver and gold lies in the fact that for centuries, they were the main form of money in the world. Thus, many investors see these precious metals as having real value in a way that paper money does not. Whenever they begin to worry that a currency such as the dollar is losing its value, they turn to precious metals — particularly gold — as safer alternatives. This flood of investment, in turn, drives up the price of gold.

Thus, the belief in the value of gold becomes a self-fulfilling prophecy. The value of gold really does rise whenever currency values fall because that’s when people invest in it. In other words, gold is useful as a hedge against inflation simply because people treat it as one.

However, gold, like other commodities, is vulnerable to bubbles in investment. When a lot of people put money into gold all at once, its price soars — which, in turn, attracts even more investment. But eventually, the market corrects itself, and the price of gold plummets. If you were one of those unlucky investors who bought gold on the way up, you could find yourself with an investment worth much less than you paid for it.

But the real downside of gold is that providing an inflation hedge is just about all it’s good for. Unlike stocks that can pay dividends, or real estate that can pay rent, gold doesn’t provide income for you. In fact, if you buy physical gold bars or coins, you have to spend money to store and insure them.

However, there are other ways to invest in gold that get around this problem. Instead of buying gold itself, you can buy stock in a company that produces gold, since its value will go up whenever the price of gold rises. You can also put money into an ETF that invests in a wide range of gold-based securities, such as the SPDR Gold Trust (GLD).

Pro tip: If you’re interested in investing in physical gold, you can do so through apps like Vaulted. Setting up an account takes just minutes and you can make a purchase almost instantly during market hours. Sign up for Vaulted.

Art and Collectibles

Like a bar of gold, a masterpiece by an artist such as Picasso or O’Keeffe tends to hold its value no matter what happens to the economy. When the dollar falls in value, the piece simply becomes worth more dollars.

The problem is that, when you buy fine art as an investment, you’re competing against professionals. Even if the sale price of a particular painting rises by 10% per year, that doesn’t mean that you, as an amateur, could get 10% more by selling it to a gallery than you did when you bought it the year before. That’s because galleries typically take around 50% of the retail price as their cut on a sale. If you bought a piece for $500 and after several years its value rose to $1,000, when you took it back to the gallery, you would most likely get only the $500 you had originally paid for it.

The same problem applies to other sorts of collectibles, such as coins, antiques, or baseball cards. In his personal finance book “The Only Investment Guide You’ll Ever Need,” Andrew Tobias relates how he tried to sell a collection of stamps he’d bought as a kid, decades earlier, to a collector. There were hundreds of them that had cost him $0.25 or more apiece. The collector asked how much the entire set weighed and offered him $25 for it — which turned out to be a pretty fair price.

For art investors today, there’s a way around this problem. Rather than buying artworks directly, you can buy shares of them through platforms like Masterworks. Much like other crowdfunded investment sites, Masterworks lets you buy a share of a verified artwork and collect a payment when the piece is sold. This allows you to work with the professionals rather than against them.

Final Word

All the strategies covered here for protecting your retirement portfolio make most sense for younger workers, who still have decades to go before they’re ready to retire. They can afford to invest for the long term because if the market takes a sudden dive, their retirement savings will have time to recover before they’re needed.

If you’re already retired or nearing retirement, inflation is still a problem for you, but you need a somewhat different approach to protect yourself from it. You can’t afford to take as much short-term risk with your investments because you need them to provide a steady income for you to live on.

If you’re in this position, seek investments that offer decent yields with little risk, such as inflation-adjusted bonds. Continue to keep some money in stocks for long-term growth, but think about using the dividends from your stock as income rather than reinvesting them. Most of all, be sure to choose a safe withdrawal rate for your sayings so they’ll last as long as you need them.

What actions are you taking to ensure that your portfolio returns outpace inflation? Share your best tips in the comments!


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