6 Ways to Fight Inflation in Retirement

Inflation can be a slow but sure killer of your standard of living in retirement. It is never too soon to equip your nest egg with weapons that can counteract the ravages of inflation. Here are six inflation-fighting investments.

1. Social Security. Social Security retirement benefits are subject to annual cost-of-living adjustments (COLA). The COLA is tied to the Consumer Price Index for urban wage earners and clerical workers. This is not necessarily the same as the annual inflation rate but better than no adjustment at all. How do you maximize this inflation-fighting weapon? Wait as long as possible to claim your benefit. Each year you delay your start date between ages 62 and 70 you can earn a 7 to 8 percent increase in benefits. Combining delayed retirement increases with annual cost-of-living adjustments can significantly increase your retirement income.

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2. Treasury Inflation-Protected Securities. The U.S. Treasury will sell you inflation-fighting weapons in the form of Treasury Inflation-Protected Securities (TIPS). TIPS are bond-like instruments issued by the U.S. Treasury with different maturities. The principal amount of a TIPS bond is adjusted every six months based on the Consumer Price Index. The inflation adjustments to principal are taxable in the year that they occur, so it is best to own TIPS inside a tax-deferred account. TIPS are exempt from state and local taxation. You can buy TIPS directly from the U.S. Treasury or through a broker. You can also purchase mutual funds and ETFs that invest exclusively in TIPS. However, these funds are more volatile than owning individual TIPS to maturity.

3. I-Bonds. These government savings bonds pay interest based on a fixed rate and an inflation adjusted rate. The inflation component is adjusted every six months. Because the interest is tax deferred, I-Bonds are ideal for owning outside a retirement plan. Like TIPS, you pay no state or local taxes on the interest.

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4. Foreign treasury bond funds. Another inflation-fighting investment option is a foreign treasury bond fund. These funds can indirectly provide inflation protection. Extreme inflation in the U.S. can cause the value of the dollar to fall in relation to other currencies. When that happens, your spending power for imported goods declines. Bonds issued by foreign treasuries in different currencies can act as a hedge against that currency risk. To capture this benefit in a foreign treasury fund, the fund itself must not currency-hedge. One example is the SPDR Barclays Capital International Treasury Bond ETF.

5. Commodities. Precious metals, copper, oil, and timber are all commodities that have traditionally been considered to be an effective inflation hedge. Commodity prices tend to increase with inflation even if stock prices are falling. The values of individual commodity assets can be highly volatile. For retirement, consider a commodity index tracking fund as your inflation-fighting weapon. You may have to select a fund that includes foreign-based commodities to fully benefit from the inflation hedge properties of a commodity investment.

[See The 100 Best Mutual Funds for the Long Term.]

6. Inflation-adjusted annuities. Annuities can be complicated and expensive to buy and own. Nevertheless, immediate annuities are popular with some conservative investors because they provide a guaranteed lifetime retirement income. The problem is that most annuity payments are not adjusted for inflation. This makes those fixed monthly annuity checks much less appealing 10 or 20 years into your retirement. Many annuity providers now sell annuity products with a benefit that is inflation-adjusted. The initial benefit is lower, but over an extended retirement the total benefits can be greater. Look carefully at the nature of the inflation adjustment feature because some have yearly caps.

If you plan to live a long life as a retiree, it’s time to choose your weapons for fighting inflation.

Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.