If you’re not factoring inflation into your retirement planning, you’ll be kicking yourself years down the road. Even if inflation remains around average — very roughly 3% — for the coming 25 years, that’s enough to cut the purchasing power of your nest egg in half.
Each of us should be planning for some level of inflation as we navigate our financial futures. And to play it safe, you might want to plan for high inflation, too.
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How to set up an inflation-resilient retirement
Delay claiming Social Security: Various studies have found that most (but not all) people will get the most out of Social Security by delaying claiming their benefits until age 70. Even delaying for just a few years can increase your benefits — and the bigger your benefit check, the bigger increase you’ll receive nearly every year from cost-of-living adjustments (COLAs).
Delay retiring: If you’re worried about your nest egg shrinking, it’s worth trying to grow it as much as possible before you retire. Delaying retiring for, say, three or five years will give you time to sock away more money, and it will mean your nest egg will have to support you for fewer years, too.
Invest in stocks effectively: Consider allocating a large portion of your assets to stocks. You’ll probably only be tapping a portion of your nest egg in your first years of retirement. Much of what you don’t expect to tap in the next five, if not 10, years might be invested in stocks. Remember that over many decades, the stock market has averaged annual gains of close to 10% — far more than typical inflation rates.
Favor dividend-paying stocks: Dividends offer a win-win-win proposition: You collect dividend payments, the share price will likely rise over time, and the dividend, too, will often increase from year to year, in many cases keeping up with inflation. You can find some attractive dividend yields these days, too. For example. Pfizer recently yielded a whopping 6.7%, and PepsiCo recently yielded 4.1%. Consider some excellent dividend-focused ETFs, too, such as the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), which recently yielded 3.25% and offers diversification.
Consider buying TIPS: Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury bonds indexed to the Consumer Price Index (CPI). So when inflation, measured by the CPI, rises, the bond’s value rises, as does its interest payment. TIPS will often sport small interest rates, though, so they won’t build your wealth much, but they’ll protect what you invest in them.
