The biggest retirement risk – inflation – is also the one you can do the most about.
Whether you're already retired or planning to retire soon, you're likely to face a wide range of threats. More than a dozen, by some counts. These include the risk of outliving your savings, withdrawing funds during a market downturn, overspending, unexpected health expenses, changing housing needs, family emergencies, poor financial advice, and even fraud or theft. All point to the need for sound retirement planning.
But arguably one of the most insidious — and easily overlooked — risks is inflation, or what experts call the erosion of purchasing power. Unlike other risks, inflation tends to creep in quietly. You don't see it happening, but over time, it can significantly diminish the value of your income and savings.
According to William Bernstein, author of "Deep Risk" and the co-founder of Efficient Frontier Advisors, investors face four major long-term threats. And of those, inflation is "the most likely" and, fortunately, "the one you can do the most about."
Understanding Inflation As Retirement Risk
In its report, Managing Postretirement Risks: A Guide To Retirement Planning, the Society of Actuaries (SOA) warns that inflation is a persistent risk, especially for anyone relying on a fixed income. The SOA notes that many workers today may not be aware of, or remember, periods of double-digit inflation like those in 1947 (14.4%), 1974 (11.1%), or 1979–81 (11.7%).
Yet even modest inflation substantially diminishes purchasing power over time. Consider: A dozen eggs cost 88 cents in 1980 but is nearly $5 today — representing an average annual increase of 3.86% over 45 years. Put differently, it now takes about 5.6 times more money to buy a dozen eggs than it did in 1980.
And for someone retiring at age 65 today, if this trend continues, those same eggs could cost $15.41 by age 95 — requiring three times more money just for this basic food item.
Brian Walsh, the head of advice and planning at SoFi, emphasizes that "inflation is represented as a single number, but in reality it affects everyone differently depending on how they spend their money."
Generally, he says, "as you get older you spend less on food, transportation, clothing and entertainment but spend more on health care, charitable contributions and services." This is why, Walsh stresses, "It's crucial for retirees to understand their spending and develop an understanding of how they are impacted by inflation rather than just worrying about headline figures."
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A History Of Inflation And Retirement Risk
While financial planners often use the long-term average inflation rate of 3.1% (since 1913) when creating retirement plans, actual inflation varies significantly across different periods:
- 1913-1920: Highly volatile, peaking at 23.7% during World War I
- 1930s: Significant deflation during the Great Depression
- Post-WWII years through early 1980s: Several periods exceeding 10%
- Mid-1980s through 2020: Generally low and stable (2%-3%)
- Post-pandemic (2021-2022): Surged to 9.1% in June 2022
- As of March 2025, the annual inflation rate stands at 2.4%
This volatility makes planning difficult and highlights the need for adaptive strategies.
Health Care Costs: A Special Retirement Planning Concern
The SOA notes that while benefits from Social Security and some government programs are adjusted for inflation, many private pensions are not.
Further complicating matters, the SOA notes that health care costs have often outpaced general inflation, creating an additional burden for retirees.
From 2015 through 2020, health care inflation consistently exceeded overall inflation, sometimes by more than double.
Managing Inflation As A Retirement Risk
Given inflation's unpredictability, how can retirees manage and mitigate its risk? Here are the most effective approaches, according to financial experts:
Equities: According to Efficient Frontier Advisors' co-head Bernstein, stocks offer solid long-term protection against inflation. While sudden inflation spikes can cause short-term market declines, equities help guard against the deeper, long-term risk of inflation eroding purchasing power.
Value stocks: Bernstein recommends tilting portfolios toward value stocks, which tend to be more leveraged than the broader market. This leverage can be advantageous during inflationary periods, as the real value of fixed-rate debt declines. He cites historical data from 1975 to 1981 showing that value stocks delivered stronger nominal returns than growth stocks during a time of high inflation.
Commodity producers and natural resource stocks: Bernstein also suggests investing in commodity-producing companies and natural resource stocks as a hedge against inflation. While gold and commodity futures are often considered inflation hedges, he notes that their high costs and inconsistent long-term returns make them less compelling.
"In contrast, equities tied to commodities or precious metals may offer better short-term inflation protection," Bernstein said.
International diversification: Steph Guild, the senior director of investment strategy at Robinhood Financial, suggests that investing outside the U.S. into non-dollar stocks, for example, can also be a way to mitigate deterioration from inflation.
Bernstein argues that it's hard to imagine an internationally diversified stock portfolio suffering permanent inflation-driven losses without widespread global hyperinflation and exceptionally bad luck.
However, Guild offers this caveat: "All of these investments can be more volatile than others, so it's important to understand that greater return over time often comes with greater risk."
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TIPs, Bonds, Social Security, Mortgages
Treasury Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) are government bonds specifically designed to protect against inflation. Bernstein notes that TIPS adjust both principal and interest payments with rises in the Consumer Price Index, offering direct inflation protection.
Bernstein considers TIPS a strong option for retirees looking to manage retirement risk and safeguard future living expenses from inflation. That's especially true when they are held to maturity in a tax-sheltered retirement account. He explains that while equities may offer higher long-term returns, retirees may not have time to ride out market volatility.
Although yields were once low, Bernstein observes that recent years have presented more attractive buying opportunities, with real yields still high by historical standards.
Short-Duration, High-Quality Bonds: Keeping bond maturities short and credit quality high helps preserve capital during uncertain inflationary environments by reducing interest rate and credit risk, says Bernstein.
Delaying Social Security: Each year you delay claiming Social Security benefits (up to age 70) increases your benefit amount by about 8%. This effectively creates a larger, inflation-adjusted annuity that lasts for your lifetime. This strategy provides substantial inflation-protected income for both retirees and their spouses.
Walsh says this is one of "two impactful ways to mitigate the risk of inflation over the long-term." He says that "claiming Social Security before full retirement age will permanently reduce your benefit, which can really add up given the cost of living adjustments that can partially offset the impact of inflation on your spending power."
Fixed-Rate Mortgages: Maintaining a fixed-rate mortgage can act as an inflation hedge since the real value of the monthly payments decreases as inflation rises. This strategy works best when combined with other inflation-protection measures to manage retirement risk.
Take A Structured Approach To Fighting Inflation
Walsh recommends a three-step process for retirees worried about inflation:
- Start by reviewing your expenses to understand where your money is going and assess whether spending is optional or necessary.
- Next, review your income sources and understand the shortfall that you will need to cover by tapping into your investments.
- Finally, see if you need to make any adjustments to your plan based on if your investments will be able to cover that shortfall every year.
With proper retirement planning and analysis, Walsh says you might not need to make any adjustments or you might need to pull back on discretionary spending. "It is important to understand that with all the information available, rather than emotionally cutting spending, adjusting investments or panicking when it is not necessary," you have excellent alternatives, he says.
Strategic Spending Adjustments: Walsh offers this advice for maintaining quality of life while managing inflation as a retirement risk. "A perfect example of thoughtful spending adjustments for retirees is travel and entertainment. When it comes to travel and entertainment, flexibility is extremely valuable. Whether it is time of day or day of the week, you can save money by adjusting your travel plans. Since you are not committed to a set schedule, school or otherwise, off-season travel may be another approach to reduce spending while still checking items off your bucket list."
Rethink Retirement Spending
While the strategies above are important for managing inflation risk, recent research suggests that there may be a need to reconsider some of the assumptions about how retirees actually spend money as they age. This research has important implications for how much inflation protection you really need.
The Retirement Spending "Smile": Traditional retirement planning assumes spending remains constant in real (inflation-adjusted) terms throughout retirement. However, research from Rand; David Blanchett, who is now head of retirement research for PGIM DC Solutions; J.P. Morgan Asset Management; and the Center for Retirement Research at Boston College consistently finds that household spending tends to decline as retirement progresses.
This pattern often follows what Blanchett calls the "retirement spending smile." That would be high spending in early retirement (the "go-go" years) and decreased spending in middle retirement (the "slow-go" years). Then, a potential uptick in later years due to health care costs (the "no-go" years).
Rand's Groundbreaking Research: For their part, Michael Hurd and Susann Rohwedder of Rand have tracked spending patterns of approximately 5,000 households from 2001 to 2023. Their pioneering work, which began with a 2008 study, has delivered compelling findings about retirement spending.
"We were the first to document that spending declines by 1% to 2% per year, which accumulates to a substantial reduction over a long retirement," Hurd said. What's more, he and Rohwedder found that "the surviving spouse often spends significantly less" when one spouse dies, and "that one-time drop in spending, averaged over the household's retirement, adds another 1% to 2% per year."
These declines occur even among wealthy retirees, suggesting the change reflects shifting preferences rather than financial constraints. "Travel is not so fun, expensive cars not so thrilling, new wardrobe to wear ... where?" says Hurd.
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Key Implications for Retirement Planning
These findings have important implications, experts say.
Inflation needs may be overstated. Full inflation protection throughout retirement may be unnecessary since real spending typically declines anyway.
Resource requirements may be lower. The standard advice to maintain your lifestyle in retirement may overestimate how much you actually need to save. "People do not need to bring into retirement as many resources as is often stated under the rubric 'maintain your lifestyle,'" according to Hurd.
However, he cautions that his and Rohwedder's findings describe average patterns. "The issue of variance — unexpected shocks — is also important. But retirees don't need full protection through income or assets. Spending can adjust, within limits, to those shocks," Hurd said.
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Surprising Retirement Planning Advice: Avoid Oversaving
The traditional assumption of steady, inflation-adjusted spending can cause people to overestimate how much they need to save for retirement, Hurd says. By adjusting projections to account for naturally declining spending, typically inflation minus 1% to 2% annually, you may find you need less than conventional calculators suggest.
This could allow you to:
- Save less aggressively before retirement
- Retire earlier than planned
- Spend more freely in early retirement years
According to Blanchett's research, the notion that people increase their spending in lockstep with inflation every year in retirement doesn't track reality for most retirees. Assuming that spending only increases by inflation minus 1% or 2% could reduce the total amount they need to save, or alternatively create the ability to spend more earlier in retirement.
Despite the potential for oversaving, Bernstein recommends a retirement risk approach that accounts for both inflation protection and the need for financial security throughout your retirement. He says five out of six times, in the long run, stocks will have higher returns than bonds. "But you also win five out of six times when you play Russian roulette," he says. "And just as in Russian roulette, the consequences of 'oversaving' and 'undersaving' are asymmetric."
And Robinhood Financial's Guild says whether pre-retirees may be oversaving in light of lower spending patterns in retirement is a high-quality problem. "There are many things you can do with 'over-savings' for your family, or even for a cause in the form of charity," she said.
Rethinking Portfolio Allocations For Retirement Risk
"If retirees' spending naturally declines with age, they may not need a significantly aggressive portfolio allocation solely to combat inflation," Blanchett said.
However, rather than simply reducing equity exposure (e.g., moving from 60/40 to 40/60 stocks/bonds), Blanchett recommends adjusting the fixed-income portion of the portfolio.
"Retirees concerned with inflation should consider replacing allocations to traditional bonds with assets like real estate, commodities and infrastructure," he says. "These become more attractive diversifiers than bonds over longer investment horizons when focused on inflation risk."
Guild adds another retirement planning perspective on asset allocation: "If you are only interested in fully spending it down over the course of your life, then yes, a steady reduction of riskier assets makes sense – similar to the way a target date fund may work," she says.
Then there is the "U-shaped approach" to retirement planning. Walsh of SoFi references a 2013 paper by Wade Pfau and Michael Kitces titled Reducing Retirement Risk with a Rising Equity Glide-Path. "Their research bucked the notion that portfolios should become more conservative over time, instead arguing that a U-shaped approach made more sense where equity allocation was lowest in the critical period three to five years before and after retirement."
"Conceptually," says Walsh, "this has always made sense to me because unlikely markets during this critical period have an outsized effect on someone's long-term success. The challenge with this concept working with clients is that it can be difficult to convince investors to become more aggressive as they age."
Retirement Planning Challenge: Finding The Right Balance
The key decision for retirees is whether to prioritize safety with assets like TIPS that provide direct inflation protection but lower returns, or to get higher growth through stocks and other investments that have historically delivered stronger long-term returns but with higher volatility.
According to Blanchett, at a high level, if you're looking for a relatively low-risk portfolio that keeps up with inflation, you could invest entirely in Treasury Inflation-Protected Securities and hold them to maturity. Or you could delay claiming Social Security if your primary goal is secure, lifetime income.
The trade-off, Blanchett notes, is that "these options offer little or no risk premium, meaning the expected returns are lower. As a result, you'd either need to save more before retirement or spend less during retirement."
On the other hand, Blanchett states that "equities — while not a perfect hedge against inflation — have historically offered stronger long-term returns, around 5% annually."
Don't Over-Engineer Your Retirement Planning
Inflation is often viewed as one of the biggest threats to a secure retirement. Rightly so. But it may not be quite the bogeyman it's made out to be. While inflation can erode purchasing power over time, research shows that retirees tend to spend less as they age, particularly on discretionary items. That natural decline in spending can offset some of the long-term effects of rising prices.
Still, it's wise to take a balanced approach. A thoughtful strategy might include exposure to equities for growth, TIPS for inflation hedging and other diversifiers to manage risk.
Don't overengineer your retirement plan out of fear. A well-constructed plan seeks to manage and mitigate inflation risk but also considers the natural arc of retirement spending. That way, you're not only protected, but also free to enjoy your retirement years without unnecessary constraints.
