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  • Writer's pictureMark Fonville, CFP®

How To Invest To Protect Against Inflation in Retirement

Updated: Nov 18, 2023

How to Invest to Protect Against Inflation in Retirement

Over the past few decades, inflation has been relatively low. But the tide had no problem (drastically) changing in 2021, in no small part due to the pandemic.

In December of 2021, the 12-month rate of inflation was 7.00%. Recent data from the Bureau of Labor Statistics revealed that the Consumer Price Index (the average change in prices of goods and services) rose 0.5% as of last December.

That's when a lot of investors who are nearing retirement or currently retired started to think about how to invest to protect against inflation.

It's a real problem.

12 month consumer price index ending December 31, 2021.

The current level of inflation has a real and significant impact on many people’s portfolios and, as such, continues to spike widespread concern. When inflation increases, your purchasing power decreases, making every dollar less valuable.

This means that a dollar today purchases much less than a dollar did a year ago. As a result, inflation makes the cost of goods that you use every day more expensive.

For example, in 1920 a quart of milk cost $0.17. By 2020, that same $0.17 only purchased 12 tablespoons of milk as illustrated in the chart below.

Inflation means that your money today will likely buy less tomorrow.
In US dollars. Source for 1920 and 1970: Historical Statistics of the United States, Colonial Times to 1970/US Department of Commerce. Source for 2020: US Department of Labor, Bureau of Labor Statistics, Economic Statistics, Consumer Price Index—US City Average Price Data.

When inflation rises, the Federal Reserve steps in and often implements economic changes to dampen the effects, like raising interest rates, slowing the economy, and limiting its balance sheet.

High inflation, and rising prices, have many people looking for deliberate ways to make sure their investments, can keep up.

The good news is that the right investment strategy may help you beat inflation, and it may not be as difficult as you think to accomplish that goal.

By building your portfolio with an asset allocation that prioritizes areas of the stock market with higher expected real returns—(in this case, real means the return you receive above and beyond the inflation rate)—you may have a stronger chance at outpacing inflation over the long-term of ten years or more.

Keep in mind that higher returns can also mean higher risk, so you may want to make sure that you de-risk your portfolio in retirement as well.

In this article, you'll learn the following:

Here's how to invest to protect against inflation in retirement.

1. Stock Performance During High Inflation Years

Stocks have historically had the highest long-term average returns of all standard asset classes, making them an excellent asset to hedge against inflationary periods over the long term.

Taken as a whole, the US Equity Market has produced annualized real returns of just under 5% since 1927. This of course includes periods of low inflation, average inflation, and high inflation.

But you can also consider how specific slices of stocks have performed compared to inflation.

Asset classes that benefit from inflation include (1927-2020):

  • U.S. Small-Cap Value: 11.95%

  • U.S. Large-Cap Value: 8.13%

  • U.S. Small-Cap Growth: 5.09%

Sectors that benefit from inflation include (1927-2020):

  • Energy Industry: 9.92%

  • Business Equipment Industry: 7.23%

  • Financial Services Industry: 6.52%

From 1927-2020 the annualized real returns in years with above median US inflation for the best performing asset classes are shown in the chart below.

Average Annual Real Returns in Years with Above-Median US Inflation, 1927-2020

While past performance can’t be assumed to reap future results, this data highlights the importance of maintaining enough equity exposure, even in retirement, and diversification among different types of asset classes, even in a high inflationary environment.

Given its ability to outpace inflation, it makes sense why many retirees benefit from holding a portion of their portfolio in the stock market as part of their overall investment strategy.

2. Treasury Inflation Protected Bonds and I Bonds

Government bonds are some of the least volatile assets you can own in a portfolio. Because of that relative safety, government bonds also typically provide lower yields than bonds issued by corporations.

So why would you think government bonds as suitable investments that offer protection against inflation?

First, understand that most government bonds have still provided average annual returns slightly above inflation over the long term. But, when we look to government bonds for inflation protection, we are thinking about two particular types.

  • Treasury Inflation-Protected Securities - TIPS, as they are called, are bonds whose interest payments are directly tied to inflation. Every six months, the principal amount on which the interest payment is based is adjusted by the most recent inflation figures. That means the interest you receive on these treasury bonds will go up by the same amount as inflation. In effect, you lock in a real rate of interest.

  • I Bonds - Series I Savings Bonds also have a built-in inflation adjustment. It works a little differently than TIPS, though. There are two components to an I Bonds interest rate. One is a fixed rate that remains constant for the life of the bond. The other is an inflation rate adjusted for inflation every six months.

3. Consider Rental Real Estate as an Inflation Hedge

The value of holding real estate comes from two primary sources.

The first is in the value of the property itself. If the price of your property appreciates over time, you may be able to sell it for more than you paid. That value is often correlated to inflation. As inflation rises, property values tend to increase as well.

The second is from the rent you can collect on it. Rental payments can be a good source of income that is structured to be a natural inflation hedge. Since most lease terms are for one year, particularly on residential property, you can simply increase the rent by the rate of inflation when the annual lease term ends.

Owning rental property can be more involved than you may like. There’s rent to collect, vacancies to fill, and damage to repair. Real estate investment trusts, or REITs, are securities that hold real estate portfolios, much like mutual funds and exchange-traded funds (ETFs) hold portfolios of stocks and bonds. You can include real estate in your portfolio through the use of REITs if direct ownership isn’t for you.

4. Your Social Security Benefits Account for Inflation

Strictly speaking, Social Security isn’t an investment. But if you are thinking about what to invest in to protect against inflation, then you need to consider your Social Security benefits.

Social Security is a great way to protect both you and your investments from inflation. That’s because the payments you receive from Social Security are directly adjusted for inflation. The greater the inflation rate, the greater the Social Security cost of living adjustment is.

When you treat it like an investment and take proactive steps to maximize your Social Security, then you can increase your inflation-adjusted income and reduce the strain on your portfolio in retirement.

Understanding the right time to start social security is important. You can claim Social Security benefits as early as 62, but you can also delay them to 70. The longer you wait, the greater your benefit becomes. It's paramount you get this part of your financial plan correct.

Remember, too, that Social Security benefits get preferential tax treatment so that increased payout will adjust for inflation and not be fully taxable. It’s hard to beat that.

How Do Stocks Hold Up During High Inflation?

Inflation can be a problem when it comes to investing. Historically, nominal stock market returns may still be positive. However, real rates return suffer. Remember, real return is the return you get above inflation.

For example, Mary's portfolio averaged 9% per year during her ten year investment period. During the same period, inflation was normal and averaged 3% per year. Mary's real rate of return is 9% - 3% = 6%.

Unfortunately, during inflationary periods, we find that real rates of return within stock markets tend to fall vs. periods of average or low inflation.

For example, John's portfolio averaged 9% per year during his ten year investment period. During the same period inflation was high and averaged 7% per year. John's real rate of return is 9% - 7% = 2%.

That's why it's so important to remain disciplined with your investment approach. Most importantly, beating inflation takes a long-term approach to investing.

For example, take a look at the chart below.

We show returns for a hypothetical mix of indexes (CWA Balanced Growth identified by the white box) and different stock and bond asset classes from 1973 to 1982. This was a period of time in the United States where inflation averaged 8.67% for 10 years.*

In 1973 and 1974, inflation topped the charts at 8.71% and 12.34%, respectively. During those same years the U.S. Total Stock Market was down -18.06% and -27.04%, respectively. (Source: Data disclosures and index data for full period 1973 to 2023)

Asset class returns from 1973 to 192 vs. inflation
Source: Buckingham Portfolio Analytics Center. See full disclosures at the bottom of this post. For illustrative purposes only.

Can you imagine living during a period with inflation over 12% while also watching your investment portfolio tumble?

That's not easy to stomach.

Protecting against inflation takes discipline and a long-term mindset. But, at Covenant Wealth Advisors, we believe that the right portfolio can give you the best chance at beating inflation long-term.

For example, the hypothetical portfolio (notated by the white box in the chart above) consists of 60% stocks and 40% fixed income to simulate investment index returns vs. inflation from 1973 to 1982 (you can't invest directly in an index).

The hypothetical 60% stocks and 40% fixed income portfolio looks like this when broken down into different asset classes:

Before fees, the diversified portfolio's average annual return from 1973 to 1982 was +10.05% (white box below) vs. CPI for inflation (gray box below) of +8.67% for the ten year period.*

This means that the average rate of return above inflation was +1.38% during the period.

But, the returns also came with some tough years in the market. Notice in the chart below the lowest historical performance for each asset class.

U.S. Small Value's worst performance year was -27.25% from 1973 to 1982 even though it was the best performing asset class for the entire time frame.

Average annual return for hypothetical portfolio vs inflation 1973-1982
Index returns and hypothetical portfolio for 1973-1982. No fees include. Indexes are not available for investment. For illustrative purposes only.

Ultimately, to get the returns you want, you must be able to endure the bad times too.


High inflation can be scary as you approach retirement.

While nothing is guaranteed, history has shown that a well-diversified portfolio of stocks and bonds may be the best way to keep pace with inflation long-term.

For more hands on investors, dipping your toe into rental real estate as a long-term investment may also be a great way to beat inflation.

Knowing how to invest to beat inflation is just the first step.

You also have to maintain discipline during volatile times, make smart tax decisions, and stick to your investment plan. That's not an easy task and most people fail to outperform the stock market according to Dalbar.

You are going to encounter times when inflation is out of control and stocks go down at the same time. Times like this will test your ability to stick to your plan.

The good news is that inflation doesn’t have to ruin your retirement.

We believe the right investment portfolio can give you the best chance of long-term success.

If you want our help managing your investment portfolio, contact us.

We are passionate about helping people create diversified portfolios and personal financial plans built for the long haul.

We’d love to help you create an investment plan that has the best chance at outpacing inflation and accomplishing your life goals. Set up a call today!


About Mark Fonville, CFP®

Mark is a personal financial advisor and the President of Covenant Wealth Advisors. He manages investment portfolio and provides retirement income planning for individuals age 50 plus who have over $1 million in investments.

He has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule a call.


Important Disclosures:

Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. We provide investment advisory, financial planning, and tax planning services to individuals. Investments involve risk and do not guarantee that investments will appreciate. Past performance is not indicative of future results.

The returns for the Hypothetical Portfolio shown in this report are based on asset class returns and not reflective of any specific product. The asset class returns are constructed using index data and do not include any of the fees or expenses that would have been incurred when investing in a specific product. Investors cannot directly invest in an index and the actual returns of a specific product may have been more or less than the index returns used in this report. The index returns used in this report assume dividend and capital gain reinvestment. The returns shown in this report should not be considered a guarantee of future performance nor a guarantee of achieving overall financial objectives.

All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, nor any other financial institution. Asset allocation models may not be suitable for all investors.

International markets and Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. Real estate securities funds are subject to changes in economic conditions, credit risk and interest rate fluctuations. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

Registration of an investment advisor does not imply a certain level of skill or training.


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