Beating Inflation in Retirement: Smart Investment Moves To Make Now

Less than half (40%) of Americans in retirement believe they have saved enough, according to the Schroders’ 2025 U.S. Retirement Survey. However, even if you feel confident about your retirement savings, inflation could take a bite out of them. Once you stop working, you may feel the effects of inflation more since you may be living on a fixed income. 

In June 2022, the inflation rate in the U.S. peaked at 9.06%. This was the highest level of inflation in over four decades, since inflation hit 14.76% in March 1980. Today, inflation hovers around 2.3%, which is slightly above the Federal Reserve’s target rate of 2%. 

Shifting your investment strategy and maintaining a well-diversified portfolio in retirement is crucial to combating the effects of inflation. Let’s talk more about inflation, how it works, and strategic investment strategies you can implement to combat it.

Key Takeaways

• Inflation significantly impacts retirees by eroding purchasing power.
• Treasury inflation-protected securities (TIPS) offer a reliable hedge against inflation.
• Maintaining cash reserves in high-yield accounts provides liquidity and security.
• Diversification is crucial for managing inflation risk in a retirement portfolio.
• Regular portfolio reviews and adjustments are essential for effective risk management.

Understanding Inflation and Its Impact on Retirement

Inflation measures how much more expensive goods and services become each year. An increase in inflation can erode purchasing power as the cost of living goes up. This can be especially problematic for retirees on fixed incomes and could hinder achieving certain retirement goals.

However, there are several wise investments you can make as a retiree to combat inflation and maintain financial security in your golden years. 

Smart Investment To Combat Inflation

Treasury Inflation-Protected Securities (TIPS)

Treasury inflation-protected securities (TIPS) are securities designed to protect you against the effects of inflation. Unlike other Treasury-backed securities that have a fixed principal, their value can fluctuate over the fixed term linked to the Consumer Price Index (CPI). 

When TIPS mature, you get the increased amount if the principal is greater than the original amount. If the principal is equal to or lower than the original amount, you still get the original amount. TIPS are typically offered for terms of 5, 10, or 30 years.

Important

While TIPS are not designed to be a profitable long-term investment, they can be a smart addition to a diversified portfolio and act as a hedge against inflation, especially if you’re nearing or entering retirement.

Cash Reserves

Maintaining sufficient cash reserves in a high-yield savings account, a CD, or both is important to maintain liquidity and meet short-term needs, especially when living on a fixed income. Generally, it’s smart to save at least six to 12 months’ worth of monthly expenses, more if you can.

Short-Term Bonds

Short-term bonds are bonds that mature in one to three years. They tend to come with lower risks, particularly those issued by the U.S. Treasury, and can be used to protect capital during inflationary periods and potentially generate income. Although bond prices do fluctuate, bonds are typically less volatile than stocks.

Equity Investments

Equity investments, or stocks, offer a long-term hedge against inflation. When people refer to “the market,” they’re often referring to the S&P 500 index, which is a strong indicator of overall stock market performance. This index tracks the performance of around 500 of the largest publicly traded companies in the U.S. and has seen an average annual return of about 10% for decades.

Besides average annual return, some stocks may pay dividends, which can create a consistent stream of passive income to further compound financial growth. However, investing always comes with risk, and stocks are no exception. There’s no guarantee of a return, and you could lose money. As you near retirement, focusing on conservative investments with a track record of consistent growth can reduce your risk while also helping you beat the effects of inflation.

Real Estate Investments

Real estate is another smart retirement investment. If you’re a homeowner, renting out part of your home, such as a basement apartment, can be a hedge against inflation since rental prices typically increase with inflation. It’s a great way to add another income stream to your portfolio.

At the same time, it’s important to understand the difference between monetizing real estate that you already own, and investing in a real estate property. To turn a profit on an investment property, the value of the property must increase more than inflation plus the interest rate on the loan, which could add up to 8.5%, or even as high as 10.5%.

Tip

Some ways for retirees to invest in real estate include renting out part of their home, purchasing an investment property, and becoming a landlord, or purchasing shares of real estate investment trusts (REITs), ETFs, and mutual funds.

Diversification: A Key to Managing Inflation Risk

A well-diversified portfolio is crucial to mitigate financial risk and enhance financial returns in an inflationary environment. Investing in various assets, including stocks, mutual funds, bonds, real estate, and more, provides a hedge against significant losses and may help shield you from market swings and economic downturns.

Other ways to manage investment risk include a periodic portfolio review with the help of a financial advisor and asset allocation adjustments over time. As you approach retirement, it becomes more important to allocate more of your funds toward conservative investments with a solid track record of long-term growth versus riskier investments such as buying shares of stock in an emerging company or sector.

What Are the Potential Risks of Investing in TIPS?

Treasury inflation-protected securities (TIPS) may lose value in a deflationary environment, which may result in lower returns compared to other types of investments. They also tend to be sensitive to interest rate changes, which can affect market prices if you sell before maturity.

How Can Retirees Balance the Need for Liquidity With Long-Term Investment Strategies?

Retirees can maintain liquidity by keeping some of their assets in cash reserves and short-term investments while allocating the rest to a diversified investment strategy focused on long-term growth.

How Often Should Retirees Review Their Investment Portfolios?

Generally, retirees may want to review their investment portfolios at least once per year, or after a significant life change or market downturn, with the help of a financial advisor. Consistent reviews can help retirees manage their risk tolerance and income needs as they age. 

The Bottom Line

Understanding inflation and how it can affect your investments is key to creating an investment strategy that results in long-term growth for your retirement. Whether it’s bonds, real estate, or TIPS, there are different investment options to carefully consider.

There’s no one-size-fits-all investment strategy for everyone. It’s wise to consult a financial advisor to tailor various investment strategies to your needs.