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Worried About Inflation? What Retirement Savers Should Do

Inflation isn’t inevitable, but you can protect your savings

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After being inexplicably tame for so long, inflation is rearing its ugly head. In September, the Consumer Price Index for All Urban Consumers rose 0.4 percent on a seasonally adjusted basis and 5.4 percent the past 12 months. The so-called core CPI — the index minus its more volatile food and energy components — increased 0.2 percent in September and 4.0 percent over the year.

Both measures far exceed the Federal Reserve Board’s target of 2 percent inflation. The Fed’s job is to keep the economy growing, and to do so with very little inflation. Inflation erodes the value of your savings every year; if you’re saving for retirement — or if you’re in retirement — inflation is your enemy. You want your retirement savings to keep its buying power over the long term, and preferably become more valuable, not less. You don’t have to panic about inflation, but you can protect your retirement against occasional bouts of rising prices.

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Is high inflation going to stick around for many years or is this just transitory due to pent-up demand, supply chain issues and stimulus payments? The vast majority of people I speak to believe that inflation is here to stay. They say that the U.S. Government is printing more and more money chasing the same amount of goods and services, so inflation must follow.

I’m not so sure. Japan has been printing money for decades and now has a debt-to-GDP ratio of 237 percent vs. 107 percent for the U.S. Rather than igniting high inflation, Japan has been fighting deflation for the past three decades. One possible explanation is that paying the interest on Japan’s debt has slowed economic growth, which slows inflation. Other explanations for Japan’s stubborn deflation include its aging population and its use of cheap labor from other countries, such as China and Vietnam.

That’s not to say what happened in Japan will happen here in the U.S. My point is that we shouldn’t be sure high inflation is coming. Bond yields are a sensitive barometer of future inflation. Most bonds pay a fixed amount of interest each year; if traders expect rising inflation, they demand higher yields as compensation. The U.S. 10-year Treasury note yielded 1.48 percent as of Oct. 1, 2021, which is an increase from 0.93 percent at the end of 2020. While that’s a pretty significant increase, I would expect yields to be much higher if the market believed 5 percent annual inflation or more were here to stay. Of course, the market could be wrong, but it has outsmarted the nation’s top economists’ forecasts.

What to do

My first piece of advice is to not be so confident that we will have high inflation for an extended period of time. Though it’s possible, it’s nowhere near a sure thing. This means hedging your investments, rather than making a big bet with false certainty. Owning some of the following is likely to help protect you against possible high inflation, but only in the long run rather than every day or even every year.

  • Stock index funds — In the short run, stocks could get hit by higher inflation and higher interest rates, but stocks have a long history of besting inflation.
  • Real estate — Inflation will eventually lead to faster price appreciation and rising rents. You can own real estate through a low-cost real estate investment trust (REIT) index fund. If you own your home, that would likely lead to greater long-term price appreciation, and you can tap the equity later in life, either by selling the house or taking out a reverse mortgage.
  • Treasury Inflation-Protected Securities (TIPS) or I bonds — The principal of these instruments increases with inflation and decreases with deflation, as measured by the Consumer Price Index.

What not to buy

There are other investments people make thinking they will provide inflation protection that I don’t recommend: Bitcoin, gold and commodities. Bitcoin is unproven, and too volatile for anything more than a small, fun investment. Gold has had very little correlation to inflation (providing little protection) and hasn’t increased in purchasing power since the days of the Roman Empire. It’s virtually impossible to own physical commodities (unless you have an oil or corn storage facility), so most commodity funds own expensive futures.

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I’m of the opinion that balance is the key. While bonds and bond funds that pay a fixed interest rate will decline if interest rates continue to increase, I strongly recommend they be a core part of virtually everyone’s portfolio to provide protection when stocks tank. Stock and bond markets usually, although not always, move in opposite directions.

I recommend sticking to a low-cost and high-quality bond fund and going out to an intermediate-term duration of about five to seven years. Duration is the measure of the sensitivity of the price of bonds and bond funds to a change in interest rates. Two funds are the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND). The longer the duration, the more a bond fund will likely decline if rates rise. But the silver lining is that the bond fund will begin to yield more over time as it reinvests in bonds paying those higher rates.

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And certificates of deposit (CDs) are a good alternative to bond funds for part of the portfolio. They can yield more than government bonds and, if rates do rise, it may be worth paying a penalty to reinvest at a higher rate, if the penalty is low enough and the rate is high enough. That also provides some protection against the possibility of rising rates.


No one actually knows what inflation will be over the next year or decade. Beware of gurus sounding confident that they know. They don’t, I don’t, and it would behoove you to realize that you don’t either. So my advice is to build your nest egg for all seasons, meaning it will withstand high inflation or low.​​

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