How a financial advisor can help you fight inflation

Inflation is down considerably from its June 2022 high of 9.1 percent, now coming in at 2.5 percent as of August 2024 compared to the previous 12 months, according to the Bureau of Labor Statistics.

But after witnessing the highest inflation in nearly 40 years, many Americans may still be worried about the corrosive effects of rising prices on their retirement portfolios. 

“If the returns on investments (in your portfolio) aren’t outpacing inflation, the real value of the portfolio diminishes over time,” says Sean Lovison, a certified financial planner at Purpose Built Financial Services.

Lovison says working with a financial advisor is one way to help protect your portfolio from inflation.

How a financial advisor can help you fight inflation

Financial advisors use retirement planning software to look at alternative scenarios for your portfolio based on different inflation rate assumptions. These programs offer more precision and nuance than an online retirement calculator, or calculations you might do on your own.

“Stress-testing a retirement projection like this provides an indication of how sensitive a given client’s financial plan is to higher inflation,” says Paul Winter, a certified financial planner at Five Seasons Financial Planning LLC.

Winter, for example, often looks at scenarios for clients where inflation runs 3 percent. This more conservative approach helps advisors better plan for potential cash flows and investment returns in retirement. Three percent is also closer to the historical average of inflation over the last century.

How inflation impacts your financial plan

Factoring inflation into your retirement plan can be challenging, especially without expert advice. But for retirees or people nearing retirement, neglecting inflation’s impact on your portfolio can be a costly mistake.

“The impact can be particularly detrimental for retirees drawing down their savings because they might run out of money sooner than anticipated,” says Lovison.

For the most part, people already in retirement tend to be more negatively impacted by higher inflation than those still working.

That’s because, in part, retirees are often on fixed incomes. If people are out of the workforce, they miss out on potential wage growth that could help offset higher prices, says Winter.

Retirees with too much exposure to cash and fixed-income investments, such as bonds, are at risk, because higher inflation erodes the value of cash over time.

While Social Security does provide a cost-of-living adjustment (COLA) based on the Consumer Price Index’s measure of inflation, a big portion of a COLA increase in any given year can be offset by rising Medicare premiums and higher health care costs.

Pensions often don’t fare well against inflation either, says Brad Wright, a certified financial planner and managing partner at Launch Financial Planning LLC.

“Pensions aren’t always adjusted for inflation,” says Wright. “So if you retired in 2021 and began collecting your pension right before inflation took off, your purchasing power could be reduced quickly.”

6 strategies to outpace inflation

Inflation can be a challenge for investors — especially those with little exposure to stocks and a lot of money in cash or bonds.

Here are some strategies to help manage inflation risk in your retirement portfolio.

Look at stocks

Over the long run, total returns from stocks have historically outstripped inflation. While past performance is no guarantee of future results, the S&P 500’s return is around 10 percent annualized over time, making equities one of the best investments during inflation, especially for younger investors.

“If you’re an investor concerned about inflation, this means you’re going to have to take on more risk to get a better return,” says Lazetta Rainey Braxton, a certified financial planner and founder of Lazette & Associates. “And more risk means more equities.”

However, not all stocks perform the same during high inflation. If you’re buying individual stocks, you’ll want to look for companies that have pricing power, which means they can raise prices on their customers as their own price of goods increase.

Some financial experts favor the strong balance sheets and healthy cash flows of value stocks over growth stocks in an inflationary environment. Inflation is often accompanied by higher interest rates, which tend to hurt growth stocks more because borrowing costs make it more expensive to finance a burgeoning business.

While equities may help your money grow faster, they tend to be volatile during times of high inflation. It’s important to have a diversified portfolio that includes different sectors and asset classes. You can achieve that pretty easily by adding index funds or ETFs that perform well during periods of rising interest rates to your portfolio. These funds provide diversification by giving you exposure to hundreds of America’s largest companies in a single purchase.

Consider some fixed-income investments

Fixed-income investments might not seem like a good move during high inflation. But some securities, like inflation-indexed bonds, offer your portfolio a defensive edge by raising your principal and interest payments when inflation occurs.

Some fixed-income assets to consider, if they offer an adequate return, are:

• Treasury Inflation-Protected Securities (TIPS)
• Shorter duration bonds
• Certificates of deposit (CDs)

Bonds aren’t always a good investment, but shorter duration bonds tend to be a better option during periods of high inflation.

“Inflation usually translates into higher interest rates, and short-term bonds are less sensitive to higher interest rates than long-term bonds,” says Winter.

You might also consider inflation-indexed bonds which offer a fixed rate of return that is linked to the prevailing rate of inflation. Two examples are Series I Bonds and TIPS.

With TIPS, your principal amount adjusts upward with inflation, plus you never get less than your initial payment if the economy experiences deflation. Interest payments also adjust upwards with inflation. However, TIPS tend to have lower yields than a typical bond.

CDs may be another option to consider right now. Online banks are offering relatively high interest rates on these products as inflation cools, which could spell an opportune moment to lock in medium-term CD rates.

Think about your cash — and where you keep it

Cash just sitting in many traditional savings accounts is especially vulnerable to inflation. Your money barely earns any interest, which means it loses purchasing power over time. One way to reduce this risk is to think about how much cash you really need.

“Make sure you’re investing as much as you can in retirement and thinking about how much equity you can comfortably handle,” says Rainey Braxton.

But ditching all your cash isn’t a good idea, either. Experts like Rainey Braxton agree that most people should set aside at least six months’ worth of living expenses in an emergency fund, along with any money needed for big upcoming purchases, such as a down payment on a home.

And for savvy investors, having extra cash on hand can help you take advantage of great buying opportunities in the stock market if the economy enters a recession.

Putting your cash into a high-yield savings account is one way to take advantage of higher interest rates while offsetting some of inflation’s eroding power. Many online banks are offering high-yield savings account rates between 4 percent and 4.5 percent in October 2024, while inflation is tracking 2.5 percent.

Delay Social Security

Not everyone gets the option of delaying Social Security. A sudden job loss or chronic health conditions may force you to start collecting benefits at a younger age.

But if you can delay claiming Social Security until at least your full retirement age (between 66 and 67, depending on when you were born), or even to age 70, you’ll receive a larger monthly benefit. Each month past your full retirement age that you delay claiming benefits, Social Security will increase your check. So, if you were born in 1956, for example, and delayed claiming benefits until age 70, your check would be about 30 percent higher than if you’d claimed at your full retirement age.

Those benefit boosts offer some seriously high returns for waiting compared to typical inflation figures.

Another benefit to delaying Social Security: The COLA is figured as a percentage of your total benefit, so the higher your monthly check, the larger your COLA increases will be each year.

Start planning now

Inflation tends to be less worrisome for young investors with decades until retirement, experts say. You’re still earning money, which helps offset rising prices. And if you have a large allocation to stocks, you may not need much additional inflation protection.

After all, it likely doesn’t make sense to drastically alter your asset allocation in response to inflation, only to find that your new asset mix no longer fits your time horizon or risk tolerance.

However, it’s important for all investors, regardless of age, to be aware of inflation’s impact on the future value of their money, and plan accordingly.

“The earlier you begin planning for retirement, the more time you have to stress test and adjust your goals and cash flow,” says Wright.

Speak with a financial advisor

Inflation is a tricky economic force. No one knows how long it will last or how high (or low) it might go. That can make planning for inflation, especially on your own, difficult.

Working with a financial advisor can help better position your portfolio to withstand the current inflationary environment without drastically altering your plans. An advisor can run projections to ensure you’re still on track to meet your goals, and suggest adjustments if your portfolio is particularly vulnerable to inflation.

There are several ways to find a financial advisor near you, including searching the database from the CFP Board.

No one can predict how long inflation will last, but a financial advisor can help make you better prepared for any outcome.

Bottom line

There are several ways investors can protect their portfolios against inflation — but it’s important to pick the strategy that’s right for you. Depending on your age and risk tolerance, you might consider adding growth stock ETFs, or explore inflation-indexed securities. A fee-only financial advisor can explain all your options and discuss how rising prices impact your retirement plans. In some ways, getting expert advice might be your best hedge against inflation.