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Inflation Protection Tips for Aspiring Retirees

David Ning

One day in the future, a loaf of bread will cost $100. It's simply inevitable. Ask any retiree, and you might even find some who will swear that inflation ought to be changed to a four-letter word. As prices rise slowly but continuously and everything costs more, the purchasing power of senior citizens declines.

But we don't have to just sit there and let inflation erode our ability to live comfortably in retirement. Here are a few ways to deal with continual price increases:

Don't panic. The effects of inflation are probably not as bad as you think. No one likes to hear about price increases, but your take home pay also increases based on the inflation rate. Many government benefit programs and even the tax brackets are adjusted for inflation as well. I'm not saying that salary increases always keep up with inflation, but you aren't automatically going to lose every time the inflation rate is positive.

Pay a fixed rate over time. There are many reasons to prefer renting instead of buying your home. But over time, the pendulum swings farther and farther in favor of buying because you can fix a good portion of your house payments over time by taking out a fixed-rate mortgage. In a decade or two, the mortgage payment will seem much smaller because inflation will likely raise prices on everything else in your budget. If you continue to rent, you'll be making higher and higher rent payments each time you renew your lease because market rates generally go up over time.

Choose investments that are expected to beat inflation. Consider investing some money in the stock market. With stocks, price increases will directly affect the revenue companies generate, which will trickle to the bottom line. Also, advances in technology and learned expertise will improve efficiencies, which will increase profits over time and benefit long-term investors.

Real estate is another area that can beat inflation over time. That's because the price of the asset generally appreciates to keep up with inflation, plus you can collect the rent generated from the holdings. And if you aren't comfortable handling the workload of managing properties, you can consider real estate investment trusts.

Track your personal inflation rate. The official inflation rate doesn't matter nearly as much as your own personal inflation rate. The published rate is an aggregate of many different items people can spend money on, including clothes, electronics, housing costs, medical expenses and transportation costs. Some categories will go up more than the inflation rate in certain years, while others will increase at a slower rate. There are items, like electronics, for instance, that will even cost less to own in some years. Everyone's spending is a little different, so your personal inflation rate will be different than mine, which will be different than the neighbor down the street. It's good to have an idea of what the official inflation rate is from year to year, but it's much more accurate to focus on what your own expense trends are instead.

David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.

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