Beat Inflation: Smart Strategies to Protect Your Retirement Savings and Spending

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Inflation is creeping up again, and while it's not at the levels seen in 2022, when it reached 9.1%, any uptick in the costs of goods is sure to worry pre-retirees and retirees.

After all, an inflationary environment lowers the purchasing power of savings and fixed income, making it harder to maintain one’s standard of living.

Inflation is the main obstacle to reaching a comfortable retirement, according to 57% of 401(k) plan participants surveyed by Charles Schwab. Only 34% of respondents said they feel very likely to achieve their savings goals, down from 43% in 2024. While they are still saving for retirement, they are curbing their purchases and buying cheaper goods to counteract inflation.

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“401(k) investors continue to face uncertainty,” said Lee McAdoo, managing director, Schwab Retirement Plan Services. “Inflation and market volatility remain top of mind, which can make it difficult to develop a long-term retirement strategy.”

For June (the latest figures available), the Consumer Price Index was up 2.7%, driven largely by shelter, although food and energy prices were also higher year-over-year. With tariffs starting to impact certain industries, economists expect the July CPI to be higher once again.

With the prospects for potentially more inflation in the months to come, here’s what pre-retirees and retirees can do to protect their savings and investments.

If you are nearing retirement

If you are on autopilot with your financial plan, now may be a good time to revisit it and make sure your asset allocation is in line with your risk tolerance and your retirement goals.

If you work with a financial adviser, they are likely on top of it, but it doesn’t hurt to check in to make sure everything is aligned. If you have all of your money in a 401(k), you can seek advice from your plan sponsor, use financial planning software, or get help from a trusted friend or family member.

“Financial planning software will give you the overall probability of success throughout the whole life cycle of the plan. It's not just looking in the next six months or year, it's looking in the next 15 or 20 years,” says Valerie Johnson, wealth planning manager at Axtella. “It may seem a little tough right now, but in the grand scheme of your retirement horizon, inflation doesn’t change it too much.”

Even if you model for inflation to rise to 5%, stress testing your current financial plan may show that you have to do nothing more than stay the course, or it might tell you a rebalancing is in order.

Schwab’s survey found that 23% of respondents said they have adjusted their 401(k) portfolio due to inflation and volatility. Of those who made changes, 79% shifted to more conservative investments. Meanwhile, 83% indicated they receive financial advice either through their 401(k) plan, family and friends, or a financial adviser.

Given the nice run in the market in recent weeks, Maggi Keating, a CFP at FBB Capital Partners, says 401(k) investors might want to take the opportunity to review their asset allocation, take some profit, and move it over to fixed income to ensure they are not over exposed to stocks.

“Last week the S&P 500 hit an all-time high every single day,” says Keating. “Your allocation may be very different when you review your portfolio than a year ago.”

Keep on saving in your 401(k)

Now is not the time to stop saving in your company-sponsored retirement savings plan. Even if you plan to retire in the next couple of years, your retirement can easily last twenty-plus years, which means there is plenty of time for your money to continue to grow and benefit from compounding.

If it's a choice between reducing your 401(k) contributions and cutting back your spending, do the latter. It's what the 401(k) participants surveyed by Schwab have opted to do.

Of those polled, only 11% say they have reduced their 401(k) contributions as a result of economic conditions. They told Schwab they need $1.6 million for retirement and estimate their savings will last 22 years once they stop working. “It’s encouraging to see that most savers are prioritizing consistency in terms of their contribution rates,” says McAdoo.

If you are already in retirement

Inflation may not return to the highs seen in 2022, but it is rising in areas that impact retirees' budgets, including housing, healthcare and insurance. As a result, Keating says retirees living on a mix of annuities, pensions, Social Security and investments should look at their asset allocation to ensure it will keep up with inflation.

“Right now, bonds are paying an attractive rate, but those rates won’t keep pace with inflation,” says Keating. “Look over your allocation and maybe add a heavier allocation of dividend-paying stocks of companies that have a history of increasing their dividends.”

Keating said Treasury Inflation-Protected Securities (TIPS) and Real Estate Investment Trusts (REITs) also tend to do well in inflationary environments. Long-term bonds may be an area to avoid if and when the Federal Reserve cuts interest rates, she says.

Pay attention to your budget

Regardless of how much you saved in retirement, you are on a fixed budget and have to make your money last, which is why it's important in inflationary periods to keep an eye on your spending instead of just putting everything on your credit card and paying the balance every month.

“When you go to the grocery store, pay attention to how it changes from last month or even last week,” says Johnson. “Pay attention to your consumption levels. When you are actively in it, that's when you have the opportunity to tweak things a little bit.”

Even if you identify $1,000 you can save over a year, it can have a profound impact on your retirement over a thirty-year horizon. “Little actions do add up to make a difference,” says Johnson.

Inflation impacts everyone, but you can be prepared

The jury is still out as to how high inflation will rise in the coming months, but either way, it is going to have an impact on pre-retirees' and retirees' savings and investments. “Inflation is one of those insidious things,” says Keating. “It's one of the things no one can escape.”

The good news is that you can prepare for it to limit the damage. From reviewing your portfolio to ensure your asset allocation matches your risk tolerance to getting your budget in line, inflation doesn’t have to derail your retirement plans, even if things cost more.

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.