Personal Finance

Getting Ready to Retire But Worried About Inflation? How to Protect Yourself

Maurie Backman

Published: December 14, 2024 7:39 am

Retirement represents a big shift in life, so it’s natural to worry about the transition. And one big concern of yours may be that your savings won’t keep pace with inflation. Given the way living costs have soared since the pandemic, that’s understandable.

24/7 Wall Street Key Points:

• A recent uptick in inflation has many near-retirees worried.
• A larger Social Security benefit could help alleviate your fear of running out of money.
• Setting yourself up with the right investment mix could help you beat inflation as you enter this next stage of life.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

A recent Prudential survey found that one-third of Americans have already postponed retirement due to persistent inflation. And while waiting to end your career might help address some of your concerns, that’s not necessarily a good solution for everyone. You should know, however, that there are steps you can take to protect yourself from inflation as a retiree.

Wait on Social Security for more guaranteed income

There are rumors that Social Security is on the verge of going bankrupt, but that’s bad information to listen to. Benefit cuts are possible down the line, but it’s also possible that lawmakers will find a way to avoid them.

But while we don’t know whether Social Security benefits will be broadly reduced in the future, we do know that Social Security rewards recipients for delaying their claims beyond full retirement age (FRA). For each year you do, up until age 70, your monthly benefit gets a permanent 8% increase. And that alone is great protection against rising living costs.

Unfortunately, Social Security’s cost-of-living adjustments (COLAs) themselves have historically done a poor job of keeping pace with inflation. But if you delay your claim and start yourself off with a larger monthly benefit to begin with, you can set yourself up with more buying power in retirement on a whole.

Choose the right investments

It’s a big myth that dumping your stocks is a smart move in retirement. A better approach? Scale back on stocks and consider a shift to dividend-paying companies for ongoing income. Or, load up on dividend-paying ETFs.

Also consider stable assets that pay consistently. Municipal bonds are often a great fit for retirees because they pay interest regularly that’s always federally tax exempt.

On their own, municipal bonds may not outpace inflation, with many offering just 2% to 3% yields. But a portfolio that’s set up with stocks and bonds during retirement could outpace inflation pretty easily.

You can also look at a growing annuity, which has payments that increase in value over time. Annuities are a generally good option for generating steady income in retirement, though it’s important to understand the drawbacks involved — notably, high fees and surrender charges for tapping an annuity too soon.

Consider a Roth conversion

The less money you risk losing to taxes, the more inherent protection you have against rising living costs. To that end, if you’re nearing retirement, you may want to consider converting a portion of your savings to a Roth IRA if you don’t have any money in a Roth account already. That allows you to enjoy tax-free withdrawals and gives you protection against higher tax rates that could arrive in the future.

You will, however, need to consult with a tax professional to get your timing right here. A Roth conversion could leave you on the hook with a large tax bill at the time.