Inflation has been chipped away at in the past year, but it’s never a good idea to expect it’ll stay under control forever. Indeed, unexpected inflationary events can happen, and one’s investment portfolio should be ready to manage them. Inflation risks in 2025 are very real, especially if the Federal Reserve runs the risk of cutting interest rates by too large an amount.

Combined with potential tariffs and factors, such as mass deportations under the Trump administration, that could spark wage inflation, and it’s a pretty good idea not to get too comfortable with inflation in the range of 2%. Of course, it’s hard to foresee where inflation will be through the year.

There’s always a chance that the Federal Reserve could have inflation at the top of its mind, given potential macro risks that could cause an inflation resurgence. Additionally, if the Fed acts with inflationary risks considered and the inflation-driving events never actually come to be, there’s also a chance inflation could stay tame and perhaps retreat further going into 2025. It’s hard to tell, but for investors, being ready for anything is advisable.

Perhaps the biggest setback for retirements is an unexpected inflation rebound in 2025. Now, a number of factors could spark a “second wave” of inflation, and while it’s hard to tell which will actually happen and to what magnitude (let’s say 25% tariffs on goods coming from Canada and Mexico actually amount to 10% or less), I think it’s prudent to be ready to shift your cost-of-living adjustment around. Whether inflation is 2%, 3%, or well above 8%, it’s only smart to stay informed with those inflationary data releases so you can adjust accordingly as things shift. 

Investing with inflation-resilience in mind

Between 2021 and today — just four short years — the dollar shed close to 16.5% of its value, making the costs of ignoring an inflation resurgence fairly hefty. Now, it’s impossible to tell what’s ahead and whether the next four years will be half as bad on the inflation front. Regardless, it’s important to understand the true toll inflation can take on one’s purchasing power.

While I don’t think there’s any need to back up the truck on the Treasury Inflation-Protected Securities (or TIPS) at these levels, I do think it’s wise to allocate a portion of your portfolio to securities that can hold up should inflation grow to become a problem again.

Indeed, a second wave of inflation could take a toll on passive incomes, bringing forth the need to cut back on expenses or reach for yield with more generous dividend-paying stocks.

Of course, reaching for yield entails taking more risk, which may not be advisable for older retirees. In any case, I think the best medicine for pre-emptively preparing for inflation is investing in high-quality stocks that trade at modest valuations. Indeed, stocks tend to be far better inflation beaters than cash or cash equivalents. While there is greater risk associated with stocks, there’s no denying their ability to dodge the punch that is inflation.

Still, not many retirees will be willing to up their equity exposure, especially if 2025 turns out to be a turbulent year for the S&P 500 following two straight years of 20% returns. That’s why mixing TIPS with low-beta and low-cost defensive dividend stocks and gold could prove a potent combo for defending your retirement from the threat of a second wave of inflation.

How bad could a second wave of inflation bite?

If you’re worried about how your retirement will hold up in the face of potential inflationary threats in 2025, reach out to a certified retirement planner to help you get ready to weather what could be another storm. It’s tough to quantify how much an inflationary rebound would weigh on one’s retirement portfolio.

If things really get bad (let’s say inflation back above 3%), inflation could take a fairly sizeable five-figure bite out of your purchasing power in just a year. And if inflation doesn’t back down through the rest of the decade, that number could be closer to six figures.

That’s why investing accordingly is a must for retirees who seek the agility to slip past the next inflationary punch thrown their way. Whether you’re going for TIPS, stocks, gold, or another inflation-resilient investment, do ensure a proper allocation to each asset. If you’re at all unsure, speak with an advisor.

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