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7 Ways to Cope With Inflation in Retirement

Tom Sightings

The Pennsylvania Turnpike lifted its toll by 6 percent in January, and it will now cost $47.55 to cross the state. Amazon announced an 18 percent increase in its Prime membership, from $132 to $156 per year. And gasoline prices are now $2.74 per gallon, up 31 cents from this time last year, according to U.S. Energy Information Administration data.

Inflation has been low for a number of years, but it's possible we've been lulled into complacency. In the 12 months through March 2018, the Consumer Price Index increased 2.4 percent. And producer prices, often a gauge of future inflation, rose 3 percent for the 12-month period that ended in March.

There's no reason to panic. Prices for some items, such as clothing and telecommunications, have actually gone down a little. And in March the CPI slowed marginally, by 0.1 percent, its first stall since last spring. But with the tightening of the labor markets and a rise in government debt, inflation could be warming up.

Inflation can have a big impact on retirees, who often live on a fixed income. While retirees no longer have to feed a family or save for a child's high-priced college education, they still have to cover food, housing costs and medical bills. And even at a 3 percent annual rate, costs go up by 16 percent over five years and 34.5 percent over ten. Considering that people retiring today can expect to live another 20 years -- and one in five will live past age 90 -- we need to consider our financial lives well into the future.

Here are seven ways to protect yourself against a rising tide of inflation:

1. Invest in stocks. Most people become more risk averse as they get older. You don't want to gamble away your nest egg in the years leading up to retirement. But the price of stocks generally keeps up with inflation. So to protect yourself, keep at least some portion of your retirement funds in stocks or stock mutual funds. Commodity stocks, such as gold and oil, tend to outperform during inflationary times.

[Read: How to Cope With Stock Market Declines in Retirement.]

2. Real estate. Since real estate tends to rise along with inflation, owning your own home is a hedge against inflation. Rental property is another investment that typically pays off during inflationary periods, since you have the ability to raise rents. But remember, if you're a landlord, you're not truly retired. Managing real estate takes time and attention, and not everyone finds it to be worth the hassle.

3. Bonds and annuities. These are relatively safe investments that certainly belong in any retirement investment portfolio. But most bonds lose value if inflation increases. However, there are some bonds, such as Treasury inflation-protected securities, that are guaranteed to keep up with inflation. The principal of TIPS increases with inflation, as measured by the Consumer Price Index.

4. Pensions. Many pensions are not adjusted for inflation, but some are. If you have a pension, find out if your payment will increase with inflation and modify your other investments accordingly.

[Read: A Guide to Getting a Pension.]

5. Social Security. Social Security payments are adjusted each year to keep up with inflation. Taking steps to boost your Social Security payments will also increase the dollar value of your cost-of-living adjustment each year. However, part or even all of your annual increase in Social Security payments might be redirected to pay for higher Medicare premiums.

6. Permanently downsize your expenses. If you downsize your house and move to a community with lower taxes and a lower cost of living, you save money throughout retirement. While the costs for taxes and home maintenance may still increase over time, the inflation will grow from a smaller base price.

[Read: How Retirees Can Take Advantage of Higher Interest Rates.]

7. Cut other expenses as you go along. You might need two cars to support your current lifestyle, but retirees might do fine with just one car. While you might do a lot of traveling during the early retirement years, as you get older you probably won't go as far afield and it might be to visit children and grandchildren. You may not like thinking about curtailing your lifestyle, but it's better to plan your own cutbacks, should they be needed, than to have the cutbacks thrust upon you by rising prices.

No one really knows whether inflation will become a problem in the next few years, but retirees with a fixed income need to be prepared for potentially higher costs. Remember to take inflation into account as you plan for your financial future.

Tom Sightings is the author of "You Only Retire Once" and blogs at Sightings at 60.

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