How to Inflation-Proof Your Retirement as Prices Keep Rising

The cost of everything is rising, from groceries to gas.

The reopening of the economy means that consumers are finally spending more money on goods and services, driving inflation up to 5.3% in August compared to a year earlier. In late August, the Office of Management and Budget said it expected consumer prices to jump 4.8% in the fourth quarter from a year earlier, more than double the Biden administration’s May forecast.

These high numbers mean Social Security recipients can expect a bigger-than-average boost to their benefit next year. The Senior Citizens League is predicting a 6.0% to 6.1% cost-of-living adjustment for 2022, and while that might come as welcome news, it’s too late to help the millions of retirees who have been coping with this year’s price increases on the meager, 1.3% raise they got for 2021.

If you’re planning to retire soon, all this inflation talk could have you spooked. Here’s what you need to know.

Is inflation here to stay?

Some Republican lawmakers blamed the Biden administration for the rising prices, saying that high government spending under President Joe Biden and Democrats led to the surge in inflation. But economists and Federal Reserve Chair Jerome Powell pushed back, arguing that high prices were due to supply chain issues that will eventually be resolved. What’s more, since prices in categories like travel fell so much when the pandemic hit, the inflation figures in those categories look disproportionately larger now that they’ve rebounded with the economy.

But some experts say that while inflation might not continue at the heightened levels we’ve seen in recent months, the Fed may be downplaying the situation.

Prices continue to rise and inflation may be here to stay, due to a combination of the federal government’s increased use of printing money to pay for what it spends over the years, and its growing deficit, says Laurence Kotlikoff, professor of economics at Boston University. (More money means more demand from consumers, and when there isn’t the supply to match that demand, prices go up.)

While the transitory components that are bumping up inflation currently may dissipate, we will unlikely go back to the 1% to 2% levels we’ve been seeing, says Shang-Jin Wei, a professor of finance and economics at Columbia Business School. The likely scenario, he says, is closer to 2% to 4%.

But even thinking about inflation, or worrying about it, may be new to some people, thanks to the low rate we’ve enjoyed for years.

“Inflation has been such a non-issue for so long until recently that people just aren’t used to really dealing with it, so even if inflation isn’t extremely high, but just higher than it has been in the recent past, it’s something investors will have to pay closer attention to,” says Amy Arnott, a portfolio strategist for Morningstar.

Retirees, especially. Over the last 30 years, retirement savers have enjoyed tailwinds because market returns have been so strong and inflation has been low, Arnott adds.

But even if the inflation isn’t as drastic as what we’ve seen this year, prices do inevitably go up. If you’re nearing retirement, you need to be prepared.