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For most retirees, inflation is always a concern because the money they’ve saved buys less over time — and the impact is worse during periods of higher inflation, which can significantly reduce purchasing power.
Higher inflation could mean that retirees, many of whom live on fixed incomes, need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. The average rate of inflation was 8% in 2022, the highest inflation rate in 40 years. By January 2024, the inflation rate had dropped to 3.1%. As of August 2025, the annual rate of inflation had moderated to about 2.9%.
Learn more about inflation and retirement and what you can do to help protect your savings.
Key Points
• Inflation is the rate at which the cost of goods and services increase over a period of time.
• Inflation can impact the cost of living in many ways, from health care to utilities. As such it can affect your retirement.
• While most retirees aim to save a certain amount they can live on, inflation can reduce the buying power of their savings.
• It’s important for retirees to consider ways to maintain the value of their retirement nest egg.
• There are several strategies retirees can use to keep up with inflation, including Treasury Inflation-Protected Securities (TIPS) and reconsidering their equity allocation.
What Is Inflation?
Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living such as gas for your car, groceries, home expenses, medical care, and transportation. Inflation may occur in specific segments of the economy or across all segments at once.
Causes of Inflation
There are multiple causes for inflation but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.
When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.
Inflation can also be fueled by the rising cost of goods, as when the cost of raw materials and production rises and gets passed onto the consumer.
Inflation and Retirement
How does inflation affect retirement? When purchasing power declines, the value of your savings and investments goes down, whether you’re investing online or through an employer-sponsored retirement plan. While the dollar amount does not change, the amount of goods or services those dollars can buy falls.
In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time. Concerns about inflation and retirement may even push back the age at which some people think they can afford to retire.
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5 Steps that May Help Minimize the Impact of Inflation on Retirement
While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the potential impact of inflation.
1. Invest in the Stock Market
Investing in stocks is one way to potentially fight inflation. A diversified portfolio that includes equities as well as fixed-income investments may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years the average annualized return for the S&P 500 has been 12.89%, though this does not take into account the cost of fees, taxes, or the reinvestment of dividends.
Even when inflation is factored in, investors may have substantial returns when investing in stocks. When adjusted for inflation, the average annualized return over the past 10 years is 9.48%, again without factoring in other costs.
In addition, stocks are subject to risk, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement so retirees tend to allocate a smaller portion of their portfolio to stocks to help manage market risk.
How much you decide to allocate to stocks depends on a number of factors such as your risk tolerance and other sources of income.
2. Use Tax-Advantaged Retirement Vehicles
To maximize the amount of savings you have by the time you reach retirement, start investing as early as you can in young adulthood, using retirement accounts such as employer-sponsored 401(k)s or Individual Retirement Accounts (IRA). The more time your money has to grow, the better.
With 401(k)s and traditional IRAs, the money in them grows tax-deferred; you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket than you were during your working years.
Another option is a Roth IRA. With this type of IRA, you pay taxes on the money you contribute, and then you can withdraw funds tax-free in retirement.
Recommended: How to Open an IRA: 5-Step Guide for Beginners
3. Reconsider Long-Term Investments With a Low Rate of Return
Risk-averse investors may be tempted to keep their nest egg invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower the risk investors take, the lower the reward may be. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.
Savings accounts, for example, typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.
Because of this, retirees may want to consider keeping a portion of their investments in the stock market, and consider using low-cost mutual funds or exchange-traded funds (ETFs), which offer some portfolio diversification.
4. Understand Inflation-Protected Securities
Treasury inflation-protected securities or TIPS, which are backed by the federal government, are fixed-income securities designed to help protect investments against inflation. The principal value of these bonds increases when inflation goes up and if there’s deflation, the principal adjusts lower per the Consumer Price Index.
However, for some investors, TIPS may have disadvantages. Like many bonds, TIPS typically pay lower interest rates than other government or corporate securities. That generally makes them less than ideal for individuals like retirees who are looking for investment income.
Also, unless inflation is quite high, and unless they are held for the long-term, TIPS may not offer much inflation-protection. There are also potential tax consequences to consider when the bonds are sold or reach maturity.
Finally, because they are more sensitive to interest rate fluctuation than other bonds, if an investor sells TIPS before they reach maturity, that individual could potentially lose money depending on the interest rates at the time.
Be sure to carefully weigh all the pros and cons of TIPS to decide if they make sense for your portfolio.
5. Consider Investing in Real Estate or REITs
Retirees may also consider investing in real assets, like real estate. Real estate is typically an inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it might also increase in value, though this is never guaranteed.
That’s why rental income from real estate historically has kept up with inflation. Investing in real estate investment trusts (REITs), may be another way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income. Just be sure to understand the potential risks involved in these investments.
Inflation Calculator for Retirement
It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator like this one, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.
The Takeaway
While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments that may offer returns, may help reduce the impact of inflation.
Another way to curb the impact of inflation during retirement is to reduce expenses, which may help the money that you have to go further. And starting to save for retirement as early as possible could help you accrue the compound returns necessary to counteract rising prices in the future.
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FAQ
Is inflation good or bad for retirees?
A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and the purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings, so inflation is something retirees need to be aware of, and to plan for.
How can I protect my retirement savings from inflation?
There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS (Treasury inflation-protected securities) and investments that may provide a higher rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).
Does your pension increase with inflation?
In some cases yes, some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits. Be sure to ask your pension provider about the terms, and consult with a professional, if needed.
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