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How to Beat Inflation in Retirement

Updated: May 16

For the Federal Reserve, the weapon of choice in the fight against inflation has been an onslaught of rate hikes and a relentlessly hawkish tone when addressing Congress.

Investors in retirement don't have the same tools available to them as the Fed and are left with cost cutting, coupon-clipping and downsizing as the best courses of action to combat rising prices.

While frugality in retirement may help you and your finances battle inflation, you'll need more than penny-pinching to win the war.

Take any sport: basketball, baseball, softball, whatever. To be successful and defeat your opponent, you have to play offense and defense. Too much of one and not enough of the other will likely result in defeat.

The same is true with personal finance, specifically in addressing the issue of inflation in retirement. Unfortunately, the media tends to focus too much attention on defensive strategies and less on the offensive.

If you just play defense, i.e. skipping breakfast every day to save money on eggs like the Wall Street Journal suggests, you may be depriving your body of valuable nutrients that in-turn could negatively impact your quality of life. Also, who the hell wants to give up eating breakfast?!?

Play Offense and Defense

Successfully counteracting the effects of inflation while in retirement can only be achieved by following a financial playbook complete with both offensive and defensive strategies.

But before we dive into the details for each, understand that everything discussed from here on out will be useless to you without a financial plan.

The reason is that a financial plan is absolutely essential in helping you make informed financial decisions today despite the uncertainty of tomorrow. For example, if inflation runs higher than expected for the next five years, a carefully crafted financial plan will help you determine what, if any changes you need to make now to prepare for rising costs in the future.

Assuming you have a plan, or at least are in the process of establishing one, here are six offensive and defensive strategies for beating inflation in retirement that you should consider implementing:


Strategy 1: Start a side-business to generate additional income

You may decide to quit working when you retire, but that doesn't mean your income has to stop.

Studies show that the majority of investors entering retirement still want to work, albeit part-time and sometimes on ventures that are radically different than how they spent their career. They understand the importance of remaining mentally fit and intellectually stimulated.

According to a recent article from Entrepreneur magazine, retirees are now earning up to $20,000 per month working one fully remote side job. Cut that figure in half and you have $120,000 of earnings working part-time.

Even if you don't want to exert any more mental energy on the job you retired from, you've likely acquired a specific set of knowledge and skills over your career that can be shared with others and monetized.

Remember, stocks, bonds and real estate aren't the only assets available to support your living expenses. Your intangible assets (i.e. experience, knowledge, skillset) can be a valuable, untapped resource to consider using in retirement, with or without rising inflation. I discuss side businesses and intangible assets in further detail here.

Strategy 2: Use your investments wisely

Over the past 100 years, stocks have trounced bonds by a wide margin.

But to realize that significant outperformance, you need to allow for sufficient time in the market.

Cash, CDs, short-term bonds and other cash alternatives carry a much lower rate of return than stocks. As such, you'll want to consider tapping these safe assets first in retirement to allow ample time for your equities to grow and surpass the rate inflation.

Think about it for a moment: If the stock market averages an 8% rate of return per year compared to 4% in bonds, you're effectively saving 4% by pulling from your fixed income bucket first.

To expand on this concept, you may even consider a home-equity line of credit (HELOC) to counter the effects of inflation. While the current rates aren't favorable at the moment, they were a few years ago and very well may be again.

For example, if you borrow on a HELOC at 4% instead of taking money out of your balanced investment portfolio of stocks and bonds averaging 6%, you're still 2% ahead while avoiding paying taxes on capital gains and IRA distributions.

Lastly, if you have a brokerage account, a portfolio line of credit could be another source of funding to consider. It's the same idea as the HELOC except that instead of using your home a collateral, the portfolio line is secured by your investments.

Strategy 3: Implement tax-saving strategies

It's not about what you earn in retirement, but rather what you keep.

The higher your after-tax return, the more money you'll have available to cover the rising costs of goods and services.

Here are a few strategies to help reduce your taxes in retirement and put more cash in your pocket:

Asset location - If you have a mix of taxable, tax-deferred and tax-free investment accounts, asset location involves strategically placing assets in each account to optimize after-tax returns. For example, reserving actively managed mutual funds to IRAs instead of brokerage accounts will help you dodge taxable, capital gain distributions.

Tax-loss harvesting - I've spoken and written about this ad nauseam because of how effective it is. Tax-loss harvesting involves selling investments at a loss to capture the deduction, then using the proceeds to invest in something comparable (i.e. selling an S&P 500 ETF for a Russell 1000 index fund). Losses can be used to offset ordinary income and capital gains.

Municipal bonds - Pay attention to the tax-equivalent yield when investing in fixed income. The tax-equivalent yield will tell you the yield you'll need on a taxable bond to equal a comparable tax-exempt municipal bond. For example, if your Federal tax rate is 33% and you live in PA, a municipal bond yielding 3.9% will give you a better after-tax return than a U.S. Treasury bond paying 5%.

Use your HSA - If you have a Health Savings Account (HSA), use it! Distributions used to cover qualifying health-related expenses are exempt from federal tax. Further, if you've kept records of medical expenses you've paid out-of-pocket, you can use HSA distributions to reimburse yourself. For example, if you paid $5,000 in cash for a knee surgery three years ago, you're able to take $5,000 from your HSA tax-free as a reimbursement which should cover a large chunk of your egg-heavy breakfast budget, swine flu or not.

QCDs - If you give money to charity every year, have an IRA and are taking required minimum distributions, consider setting up qualified charitable distributions, or QCDs. By donating to a charity directly from your IRA instead of your checking account, your RMDs will become tax-free. No deduction will be allowed for your charitable donations, however most taxpayers don't itemize anyways, and likely wouldn't have benefited from the deduction.


Strategy 4: Review your portfolio and modify accordingly

Einstein once said: "Insanity is doing the same thing over and over and expecting different results."

The same 60/40 portfolio that shined in a 2% inflationary environment may not work as well with the Consumer Price Index (CPI) at 6%. As such, it's important to take action, review your allocation and make adjustments as necessary.

Stocks have historically been one of the best asset classes for outpacing inflation, specifically ones that are able to pass along rising input costs to the consumer. A good example of this is McDonald's, the fast food chain that's raised the price of their signature Big Mac burger 22% since the pandemic.

I'm not saying to invest all your money into McDonald's, but rather ensure your portfolio has exposure to companies like this that are able to absorb inflated costs and benefit from them. That could be a basket of semiconductor stocks held in a low-cost ETF, or simply a broad index fund like the S&P 500.

Another asset class to consider during inflationary periods is commodities, though be prepared to stomach a high degree of volatility.

For fixed income, Treasury Inflation-Protected Securities (or TIPs) can help keep pace with inflation as the principal amount of these bonds is adjusted up or down based on the Consumer Price Index, or CPI.

What matters most is not picking the right stock funds or having the perfect allocation to gold, but rather the act of reviewing your investments and implementing a strategy that accounts for changes in the current economic environment.

Strategy 5: Get clear on your spend and adjust around what matters most

Notice how I didn't say, "cut back on everything."

I prefer rephrasing that statement and positioning it as a positive financial adjustment rather than a negative cost cutting requirement. The reason is that you may not have to reduce costs entirely but instead make a shift in where your money is being spent.

Bestselling author Ramit Sethi describes living a "rich life" as spending frivolously on things you love and cutting mercilessly in areas you don't. By doing this, you're effectively repurposing your spend in a way that more closely aligns with your values without (potentially) needing to tighten your budget.

For example, let's assume you're spending $300 per month on cable and internet, yet prefer being outdoors or reading books and couldn't care less what's on TV. In this case, cutting the chord could put a few thousand dollars in your pocket each year to spend on your garden or a line of mystery novels without feeling depressed that inflation has gotten the better of you.

These budgetary adjustments can be large and more impactful than cutting your monthly utility bill, too. It's not uncommon for empty nesters to sell their home and purchase a small ranch or condo, thereby leaving more money available to allocate towards an overseas excursion or dining out five days a week.

The point is, before you accept defeat and slash spending across the board, carefully review where your money is being spent and be certain it aligns with your definition of a rich life.

If you do have to trim expenses, understand that it's likely a temporary shift and nothing that a meticulously orchestrated financial plan can't fix over time.

Strategy 6: Maximize social security benefits

If you were born after 1943, delaying filing for social security will increase your benefits by 8% per year until age 70. For perspective, that increase is roughly 5% higher than the long-term average inflation rate.

That math is fairly straightforward and would indicate most investors would be better off financially by delaying social security and capturing the 8% annual increase. But the reality is, filing sooner may be the better option.

Some reasons you may want to collect social security earlier in retirement include:

- The need for additional income to cover a higher cost of living (very common)

- Fear of getting hit by a bus and losing unclaimed benefits

- Not wanting to touch your investments

- Confidence in your ability to invest your social security income and earn more than 8%/year

All of these are valid justifications for dipping into the social security pot early. But remember, the decision to file will have permanent, long-lasting consequences in retirement and can't be undone.

Whether you decide to file or delay, you should consider running a social security maximization analysis to help you optimize your benefits and ensure you're at least maintaining pace with inflation in retirement.

If you don't have a financial plan that encompasses a social security maximization analysis, there are handful of online tools available for you to choose from.


Thankfully, the rate of inflation is moving in the right direction. And hopefully, the Fed can successfully engineer a soft landing and avoid a full-blown recession.

In the meantime, the price of everything remains very high making it a challenge for some investors in retirement.

Before giving up breakfast and living off of Ramen and peanut butter, remember that successfully overcoming inflation in retirement requires both offensive and defensive financial strategies. Be certain you're implementing both.

When in doubt, ask a professional for help.

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Image by Aaron Burden


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