Whether retirement is two years away, 10 years away or three decades away, inflation will affect how you save and spend your money in the future — that’s why you should factor it into your calculations if you can. 

Retirement Tip of the Week: Choose your investments and your savings vehicles wisely when putting money away for retirement, not only for potential returns but so that those assets are working for you and against the loss of purchasing power. 

In June, the cost of living saw its largest spike since 2008, which means the purchasing power of the dollar toward various goods has dwindled. Used cars accounted for more than one-third of the rise, but the cost of food, clothing and plane tickets also sharply climbed, according to the Bureau of Labor Statistics. 

Read: What inflation means for your retirement

Inflation affects everyone differently, said Brian Schmehil, a certified financial planner and director of wealth management for The Mather Group. “Each household has their own specific inflation risk since it will depend on their budget and the type of assets they own,” he said. “Households wanting to purchase a second home later in life, spend a higher percentage of their budget on healthcare or have smaller Social Security benefits, may have a higher inflation risk to their retirement plan than others that do not.” 

Keep in mind, there’s also no certainty regarding inflation and what it will be like in the future. “The bond market makes active predictions on what inflation will be like in five, 10, 20 years,” MarketWatch columnist Brett Arends said during a recent Barron’s Live event. “These are the best forecasts of inflation that we have, and they’re much more important I would argue than one month’s reading or three month’s reading.” The inflation spikes the government is currently seeing could be a direct response to the temporary shortages as a result of the pandemic, he said.

See: How to invest in a Roth IRA like — and unlike — PayPal co-founder Peter Thiel

One of the best defenses against inflation: A well-diversified portfolio, said Sergio Garcia, a certified financial planner at BFS Advisory Group. Cash savings is best for short-term expenses and emergencies, but the younger the investor, the more focused she should be on equities and growth in an investment portfolio, he said. 

Younger investors, with a decades-long horizon until retirement, do not have to worry as much about inflation right now as their older counterparts, said Seth Mullikin, a certified financial planner and founder of Lattice Financial. “First, younger investors are still earning money and will likely see their income rise with inflation,” he said. “Second, young people tend to have a higher allocation to stocks than retirees, which will perform better than a fixed-income portfolio.” Instead, younger investors should focus on maintaining a healthy savings rate that will allow them to meet their goals, he said. 

But conservative investors — those who may be afraid of putting too much of their portfolios in stocks and other equities regardless their age — should take note from the advice given to younger investors, Mullikin noted. “Stocks tend to keep up with inflation over time, so even conservative investors should hold some stocks,” he said. 

Older investors closer to retirement are typically advised to reduce the risk in their portfolios by gradually shifting to more fixed-income assets, like bonds, because they have a shorter period of time until they retire (and they’ll need their money to be there for them sooner). 

Still, they should be diligent when considering their investment choices. “In environments with rising rates, it is important for those investors to consider the allocation within the fixed income portion of their portfolio and possibly reduce duration in bonds, and in some cases, reduce exposure to fixed income in favor of equities,” Garcia said. To ensure they meet their cash flow needs, near-retirees and retirees should keep “adequate” cash on hand in an account they can easily access. This allows their investments to be protected against long-term inflation, he said. 

Have a question about your own retirement concerns? Check out MarketWatch’s column “Help Me Retire” 

Treasury Inflation-Protected Securities, also known as TIPS, is one investment option that helps offset inflation, Mullikin said. Deferring Social Security can also beat inflation, Schmehil said. “This will help combat inflation since a larger share of your expenses will now be covered by a government program that has a COLA (cost-of-living adjustment).” 

Another hedge against inflation is homeownership. “Buying a home with a fixed-rate mortgage will ‘lock in’ the majority of your housing costs, and you will build equity,” Mullikin said. “This is because the principal and interest portion of your mortgage will remain the same throughout the term of the mortgage.”

Homeownership — although expensive and for many Americans, unaffordable or unappealing — as a means of inflation protection only works if the owners intend to stay in their houses for the next decade or so, said John Scherer, a certified financial planner and founder of Trinity Financial Planning. But those who have bought in recent years may benefit most of all if so, since mortgage rates have been relatively low. “With inflation, the price of food, cloth and fuel all go higher, while the cost of housing (not including taxes and insurance of course) stay fixed,” he said.

Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column

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