Think Inflation Will Return? How to Protect Your Retirement

Last Updated Apr 27, 2010 9:58 AM EDT

Yesterday CBS MoneyWatch editor-in-chief Eric Schurenberg appeared in a video memo stating that the U.S. Will Default on Debt, most likely by printing more money and inflating away the value of the dollar. This is a nightmare scenario for retirees and older workers approaching retirement, and it's concerned me for awhile.

While I can't predict with total certainty that high inflation will happen in the next decade or two, there's a large enough chance it could happen that you should take steps to protect yourself if it does happen. So what should you do? While it's likely you'll think about investment strategies, first I'll cover two other considerations that might be more important.

In any financial calamity, whether high inflation, recession or depression, the people who typically fare the best have skills that are in demand--i.e. they have secure jobs that cover their living expenses. This is one reason why you might want to stay in the job market for as long as possible in your later years. To enjoy yourself and feel like you've made a positive change in your life, you may want to work part-time and do work that you like, as advocated in my recent post Do The Downshift.
You should also take care of your health, so you don't drain your resources with high bills for medical and long-term care. You want to keep your mind sharp, so you have your wits to make important decisions in a crisis. Medical and scientific research shows us how to achieve these goals; for helpful resources, see my prior post It's a Good Time to Be Aging.

Now let's turn to financial and investment strategies. Here are some possibilities:

  1. Keep a stash of cash investments or Treasury Inflation Protected Securities (TIPS); that will give you a resource that should hold its value.
  2. Have some investments that are denominated in currencies that keep their value relative to the dollar. This is one reason to have some assets in non-U.S. stocks and bonds. Which ones? Like me, you're probably not an expert in the economies around the world, so consider investing in a mutual fund that is diversified across various countries.
  3. Hard assets such as gold and certain commodities have done well during inflationary times.
  4. Real estate can be a store of value in inflationary times, provided it meets the "location, location, location" requirement. If you want to really get ahead, buy real estate with a fixed mortgage, since the value of the mortgage will be inflated away.
  5. Finally, Social Security benefits are indexed for inflation, even though Social Security is one of the sources of debt that Eric discusses in his video clip. Maximizing Social Security benefits by delaying commencement of benefits is another inflation-protection strategy, since you're maximizing a lifetime income that increases for inflation. See my prior post When Should You Start Taking Your Social Security Benefits? for more on this topic.
But what if we don't have inflation? What if the recession returns or we get deflation? Again, I can't predict with certainty that these events will happen, but there's a large enough chance that you should also protect yourself if this scenario happens. In this case, the first strategy stated above would be still be a good idea. The second and third strategies may or may not do well, depending on the specifics of the recession. The fourth strategy could be a bad idea if the value of your real estate drops significantly and you're stuck with a fixed mortgage payment. The fifth strategy, maximizing Social Security benefits, works well in a recession since benefits aren't affected by the stock market.

There's a good chance that most of you will still be alive in 10, 20, or 30 years. There's also a good chance that at some time in the future, we'll see high inflation, another recession, or both. While I can't predict with certainty when these events will happen, I'm pretty sure they will happen at some point in the future. So it makes sense to diversify your investments and your sources of retirement income, and I'll cover how to do this in my next post.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.