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5 strategies to preserve retirement buying power during an inflation spike

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Spiraling inflation is increasing anxiety over retirement investment accounts and how to strategize through turbulent times. We talk to experts who look at 5 strategies for dealing with inflation pressure on retirement savings to help preserve retirement buying power.

One retirement fund manager, in looking at inflation challenges, pointed out that with just a moderate inflation rate of 3%, the $60,000 you might need for your first year of retirement would be worth less than $34,000 in 20 years. And, currently, inflation is running at 8.6%. You do the math.

Increases in inflation have a much larger impact on those retiring soon, versus those who won’t be retiring for years. But even small increases in inflation can significantly impact a retiree’s purchasing power and ability to grow a nest egg.

1. Retirement experts: Don’t panic

But retirement account specialists, consultants, and managers generally say there’s no need to panic, even if retirement is right around the corner. Many if not most retirement plans build in inflation scenarios, though perhaps not accounting for inflation at the current level. The keys to strategizing and managing retirement accounts during inflationary periods, they say, is not to go it alone.  First, enlist a team of financial advisors, diversify your portfolio, and keep a steady eye on varying conditions, and work with your advisors to understand how best to react to them. And, of course, tighten your belts and dispassionately evaluate your spending needs.

“There’s more pressure on someone approaching retirement today than there used to be,” said Mike Lynch, managing director of Applied Insights at the Hartford Funds. “If you’re leaving your job, retirement planning almost becomes your next job. And it’s more important that once you reach that phase, you put a team in place: a tax professional, financial professional, and attorney to really get at your individual situation. Your new role might be managing your investments but the days of just putting it on autopilot are gone.”

Lynch reminds his clients that regardless of the current rate of inflation or state of the economy, these are not new obstacles to saving and strategizing. We’ve been here before and history is a good guide on how to handle them.

“During challenging times, whether it’s inflation, tax increases, wars, pandemics, the market in the long run has always done pretty well,” he said. “I don’t want to minimize where we are today, but this isn’t the first inflationary period we’ve had, and it won’t be the last.”

2. Using the ‘Monte Carlo Method’

Like many fund managers, Thomas Willcox, partner and private wealth advisor at McBee Avenue Wealth Partners, a Northwestern Mutual Private Client Group, uses what’s known at the “Monte Carlo Method,” a multiple probability simulator that estimates possible outcomes of an uncertain event.

“The Monte Carlo will run about 500 different scenarios that could have high inflation, low inflation, normal market returns, abnormal market returns, whether they’re high or low and we can project results within a 90% certainty based on what a client is currently doing,” said Wilcox. “Employing those scenarios, we will be able to keep up with inflation and meet the goals we’re trying to accomplish.”

Wilcox said he uses about 80% to 85% of what a client is currently spending as a baseline and divides it among essential needs: housing costs, utilities, medical expenses – to come up with an investment plan that anticipates fluctuating economic factors.

“Several years ago, some people in the industry were saying that everyone was using too high of an inflation factor when they were running the planning scenarios,” he said. “They’re not saying that anymore.”

3. Investors look for new ways to hedge

Typically, investors will look for new hedges against inflation when prices are rising, but sometimes options are limited.

“There are a few actions future retirees can take to lessen the impact of rising inflation,” said Jason Steeno, president of CoreCap Investments and Advisors, in Southfield, Mich. “You could add additional funds to your portfolio now; decrease your income needs during retirement or even postpone retirement to a later date.”

Steeno said it is important for retirees to know that investment plans are not set in stone and should evolve and change to meet present circumstances.

“The plan may require an infusion of additional funds to offset the impacts of inflation or a shift into asset classes that may benefit from inflation,” he said. “The important point is that future and current retirees should have discussions with their advisor about how to adjust the plan to ensure the best chance of success in the future.”

4. Expert says invest in inflation

Andrew Gold, a financial advisor and educator with Prestige Wealth Management, says one way to combat inflation is to invest in it.

That’s why you see institutions move funds from growth stocks, which are inflation and interest rate sensitive, to value stocks which are the golden backbone of the economy, like grocery chains, tobacco, alcohol, cosmetics, and fast food,” he said. “Those are staples and regardless of their cost we find ways to afford them. They also tend to be larger companies and pay a dividend which helps with fluctuations in the market.”

Assessing different asset classes, from stocks, bonds, real estate, even crypto currencies, is a must when planning future retirement goals.

5. Real estate ‘a good investment’

With the annual growth rate hovering around 6% to 8% every year, real estate will always be a good investment choice,” said Johannes Larsson, founder and CEO of “If you believe you have enough funds to get into real estate you must surely step in, since this is considered the highest rewarding strategy, as well as can be credited enough for an alternative income stream as well.”

Some fund managers say clients often overlook their own real estate when making their financial plans.

“I think one thing that people are not paying attention to, is the fact that their home values, in most cases, have appreciated tremendously,” said Stephen J. Resch, VP of retirement strategies at Finance of America Reverse, a reverse mortgage specialist.

“In many cases, the home is appreciated to a greater extent than portfolios have over the past few years,” he said. “So, I’ve always believed in bringing home equity into the retirement planning process. If we look at all asset classes being cyclical, the investment markets are doing poorly right now. So why not draw and supplement as you need from your asset class that is doing very, very well at this point in time, and allow the other cycles to work through and wait for your investments to recover before you start drawing from those again?’’

Inflation is one of 3 major risks

Steve Scanlon, head of Individual Retirement at Equitable, counts inflation as one of the three major risks impacting advisors and their clients this year, along with rising rates and market volatility. He believes that the key to managing inflation is creating a resilient portfolio that allows for access to potential market growth to potentially keep up with inflation, while limiting downside risk, especially as people near and live in retirement.

“Another strategy is to look beyond classic stocks and bonds to alternatives to drive growth and hedge against the impact of inflation,” he said. “RILAs or classic tax deferred annuities can fill the role of alternatives in portfolios, allowing advisors to take advantage of potentially higher growth in more volatile asset classes like emerging markets, and allowing for the ability to seamlessly shift asset classes within that sleeve.”

As interest rates rise, he said, traditional guaranteed income annuities are becoming more attractive.

“Insurers can increase crediting rates that can later translate into a higher base of income for retirees,” said Scanlon. “Which can help to preserve cash flow and buying power in retirement in the face of higher prices.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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