5 Smart Ways to Protect Your Retirement Nest Egg Against Soaring Inflation

Reviewed by Molly Moorhead, CFP®
An older couple pose for a portrait. They have serious expressions on their faces.
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Freda Robinson, 65, lives a frugal life. She uses coupons, compares weekly grocery store ads and hunts for the best deals.

But rising inflation worries Robinson, a South Carolina resident who retired from her job in May 2018.

She’s concerned that her nest egg won’t last as prices on everyday items continue to rise.

“I would dare say anyone who isn’t Jeff Bezos is concerned about outliving their savings after they retire,” Robinson told The Penny Hoarder.

Inflation is higher than it’s been since the 1980s. And those higher prices are alarming for retirees, said Summer Red, an accredited financial counselor at the nonprofit Association for Financial Counseling & Planning Education.

“Retirees often have limited resources — their incomes may be fixed and their only other assets are their savings and their house,” Red said.

Social Security and savings are the two biggest sources of income for most retirees. While Social Security does increase annually for inflation, savings do not.

Why Inflation Affects Retirees More Than Everyone Else

Retirement savings can mean a few things. It can mean cash in a savings account or investments held in a retirement account, like a 401(k) or IRA.

Retirees with money in a diversified portfolio or retirement account are generally better equipped to weather high inflation. That’s because stocks have historically — over long periods of time — outpaced inflation. In fact, the average stock market return is about 10% per year for nearly the last century.

So investments like in mutual funds, ETFs or others with a decent stock allocation are less likely to lose value as inflation increases.

But retirement planning generally involves moving assets out of stocks and into safer vehicles as retirement draws closer. So there are millions of retirees sitting on mostly cash (like a savings account) or fixed-rate investments (like bonds and CDs).

“If the interest rate on a savings account is less than the rate of inflation, the purchasing power of the savings actually decreases,” Red said.

Less money to last the next 10, 20 or 30 years is never good news — especially for retirees on a shoestring budget.

“If they have to draw down faster on their savings than planned, they may not have enough to cover costs later in life,” Red explained.

5 Things Retirees Can Do to Hedge Against Inflation

While there’s no perfect playbook to protect against inflation in retirement, there are a few things you can do to hedge against economic uncertainty.

1. Consider Buying I Bonds

If you’re one of those retirees sitting on mostly cash, Series I savings bonds (just I bonds for short) are a good option.

It’s a safe investment — I bonds are sold and backed by the U.S. government, which has never defaulted on bonds. Unless the government collapses, you can’t lose any money you invest in I bonds.

I bonds also keep pace with inflation: In November 2021, the Treasury announced an eye-popping 7.12% interest rate for Series I bonds through April 2022 — the second highest rate ever for these investments.
For context, nearly all high-yield savings accounts and CDs fetch less than 1.5% annual interest rates.

If you’re waiting for a catch, here it is: There’s no guarantee I bonds will continue paying 7% after April. The government resets the interest rate every six months, depending on inflation. So the new rate could go up or down.

But consider this: Inflation sat at 6.8% in November when the U.S. Treasury announced the current I bond rate. By February, inflation hit 7.5%. So inflation is now the highest it’s ever been since I bonds were first created in 1998.

I bonds carry a few restrictions you should know about. You must hold them for at least one year — you can’t get your money back any sooner.

After a year, you can cash them in, but you’ll lose three months worth of interest if you cash out less than five years after purchase.

You can purchase up to $10,000 of I bonds a year and there are only two ways to buy them: on the U.S. Treasury’s website or with your tax refund.

You can tell your tax preparer you want to buy savings bonds with part or all of your refund. Tax software can also help walk you through the process.

Check out this article if you want to learn more about investing in I bonds.

2. Cut Back Where You Can

No one knows how long high inflation will last.

Some economists believe it’ll taper off in the next few months. Others predict it could be a year or more before inflation drops to a more normal 2% to 3% rate.

Either way, inflation isn’t expected to last forever.

Red and other experts suggest taking a new look at your retirement budget and cutting back on discretionary spending until the economy normalizes.

“Reducing entertainment or travel expenses in the short term will free up more funds for essential expenses without increasing a drawdown on savings,” Red told The Penny Hoarder. “Once inflation stabilizes, they can rework their budget to accommodate current pricing.”

But that’s easier said than done considering almost one in 10 people 65 and older lived in poverty in 2020, according to the U.S. Bureau of Labor Statistics.

There are plenty of ways to save money at the grocery store and the gas pump.

But for retirees like Robinson, it’s hard to find places to cut costs.

“My budget can’t stand prolonged inflation,” Robinson said. “I’m just hoping it will be over soon.”

Pro Tip

Here are over 300 ways to save money in virtually every area of your life.

3. Be Shrewd With Your Health Care Dollars

Health care is usually your biggest expense in retirement.

According to Fidelity’s Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 will need approximately $300,000 after tax to cover health care expenses in retirement.

Saving money on health care is especially challenging for early retirees because they usually can’t qualify for insurance through a former employer and Medicare doesn’t kick in until 65. If you’re trying to bridge that gap until Medicare kicks in, try strategies like negotiating your medical bills or using an HSA to pay health care costs. (Once you’re enrolled in Medicare, you can’t contribute to an HSA.)

Whether you have Medicare or private insurance, signing up for a prescription drug discount card or using an app like GoodRx can help you save on prescription drugs.

Your health care expenses don’t just disappear once you enroll in Medicare, though. You’ll still owe premiums, deductibles and other out-of-pocket costs. Medicare isn’t free, after all, and the program is difficult to navigate.

Need a refresher on Medicare? Here are seven frequently asked questions about the federal health insurance program. 

Thankfully there’s a government-funded program that can help you save money on Medicare.

The State Health Insurance Assistance Program, or SHIP, is a national network of trained volunteers who provide one-on-one assistance, counseling and education to Medicare beneficiaries and their families.

It’s completely free.

A SHIP counselor can assist you in many ways, whether that’s helping you compare Part D drug plans, screening you for money-saving benefits or answering enrollment questions.

They can also offer guidance on unique situations, like how Medicare interacts with Medicaid.

You can find your local SHIP by using the online SHIP Regional Locator or by calling the national network hotline at 1-877-839-2675.

4. Look for Ways to Generate Income

Generating money is another way to offset inflation.

You can explore part-time jobs for retirees or check out work from home jobs that fit your skill set.

Even bringing in an extra $150 to $300 a month can help offset rising inflation, experts say.

There are other less conventional ways to generate money too, like selling unused items around the house or selling your car. In fact, the price of used cars has skyrocketed in recent months, so you’ll likely net more for your vehicle now than you would have a year or two ago.

Pro Tip

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5. Speak With a Financial Advisor

Figuring out how much money you need in retirement is tricky. There are a ton of variables to consider, and everyone’s situation is different.

Speaking with a financial advisor is one of the best ways to ensure you have a solid plan in place to protect against inflation.

Many experts recommend fee-only advisors — also known as fiduciaries — because these professionals don’t receive any commissions or kickbacks for suggesting certain investments. They work in your best interest, so you can rest assured you’re getting fair, unbiased advice.

A certified financial planner can also determine a good drawdown strategy for your retirement savings. This helps minimize taxes and losses so you keep more money in your pocket.

Like most things in life, advice from a financial planner isn’t free. Most CFPs charge an hourly rate of at least $100, while others offer a package of three or four one-hour sessions for $300 to $400.

However, an hour with a qualified professional can help save you thousands of dollars in the long run. It will also give you a chance to speak one-on-one with someone who can offer personalized advice that works for you.

Pro Tip

Here are six ways to get free or low-cost financial advice

Make sure you carefully research financial advisors in your area. Here are a few questions to ask a financial expert before you shell out any money.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.