How Inflation Hurts Retirees and How You Can Protect Yourself

What is inflation, and why does it matter?

In simple terms, inflation means prices are rising, and your purchasing power is declining. It’s that painful pinch you feel when you pull out your wallet at the grocery store or gas pump.

If you’re on a limited or fixed income — as many retirees are — inflation can take a significant toll on your lifestyle and your nest egg. You may have the same amount of money coming in, but you can’t buy the same goods and services with it.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Consumers have been paying more — a lot more — for food and fuel for a while now. But the price hikes haven’t stopped there. (Et tu, Netflix?) According to the Bureau of Labor Statistics, inflation surged by 7% (opens in new tab) in 2021, the largest increase in nearly 40 years. And core inflation, which excludes those volatile food and energy prices, rose 5.5% from a year ago. The numbers in January were even worse: The Consumer Price Index showed prices were up 7.5% overall (opens in new tab) in January vs. a year ago.

Unfortunately, Social Security’s 2022 cost-of-living adjustment (COLA) — a generous 5.9% — won’t help retirees much. High prices are expected to take a sizable bite out of that boost in benefits every month, and this year’s 14.5% increase in Medicare Part B premiums will likely gobble up whatever is left.

So, what can you do to ease the pain of inflation? Here are some steps to consider:

Rethink Your Portfolio

Whether you’re already retired or looking to retire in the next few years, to generate a real return from your investments, you must earn more than you’re losing to inflation. (Currently, that would mean earning more than 7%.)

Thanks to a strong market, you may have achieved that goal this past year. Looking ahead, however, you might want to make some changes to ensure you can maintain those inflation-beating returns.

Your financial adviser can help you decide which options and opportunities are appropriate based on your time horizon, risk tolerance and goals. And there are plenty of strategies to look at, including investing in dividend-paying stocks, real estate investment trusts (REITs), gold, fixed-income annuities, U.S. Treasury Inflation-Protected Securities (TIPS) and IShare TIPS exchange-traded funds (ETFs).

Review Your Income

Are there steps you can take to increase your income, even if it’s only a temporary bump, to get you through this current wave of inflation?

If you’re already retired, that might mean doing some freelance consulting, taking a part-time job or selling some of your Star Wars collectibles on eBay. Other options could include potentially utilizing a reverse mortgage to supplement your income or, after a careful analysis of your investments, temporarily increasing your required minimum distribution.

If you’re still working, did you get a raise this year? Was it enough to cover the rise in your cost of living? If your income didn’t increase by more than inflation, you effectively got a pay cut. You may want to consider asking for a bit more or a one-time bonus.

Control Your Expenses

When was the last time you sat down and took a good look at your budget? Expense creep is real — and you may be an unknowing victim if you’ve put the bulk of your bills on autopay. It’s easy to fall into the trap of thinking, “Well, it’s only a little more each month,” for a subscription service, club membership or other discretionary expense. But those monthly spends can add up if you aren’t paying attention.

Are there places you can cut expenses? You might want to start where inflation is hitting the hardest — by dining out less, spending less on certain foods, and planning car trips more carefully to save on fuel.

It also may be a good time to evaluate your debt. Would refinancing your mortgage or taking out a bill consolidation loan while interest rates are still low help you free up some cash while times are tight?

Don’t Panic

Imagine you’re in California, driving down the Pacific Coast Highway. On your right, the sun is setting over the beach, and it’s beautiful. On your left, traffic is at a standstill because of a bad car accident. There are sirens and flashing lights. And the wreck is getting all your attention — it’s getting everyone’s attention — instead of the awesome sunset.

Don’t let that happen to your retirement.

If you’re worried about inflation, be proactive and ask for help if you need it.

Having the right plan in place can make it easier to tune out the noise and stay focused on the amazing years you have ahead of you.

Kim Franke-Folstad contributed to this article.