How a Surge in Inflation Affects Retirement Savings — and the Asset That Can Help

Many retirees expect inflation to rise by about 2% a year, since that has historically been a normal pace. But when inflation jumped sharply in 2022, many were caught off guard. Even though higher cost-of-living adjustments can help, Social Security benefits do not always keep up.

Stocks and bonds both lost ground during the inflation spike, while gold and other commodities gained. Inflation does not always remain tame, so getting ready for a period of higher prices can help reduce losses.

What inflation does to a retirement portfolio

When inflation rises, bond yields usually move higher too, which can benefit investors looking for newly issued bonds. But those higher yields make older bonds less attractive. That may not matter if you plan to hold a bond until maturity, but if you need to sell, you may get less for it.

Stocks often have a harder time in high-inflation periods because business costs rise and consumers have less buying power. That said, energy and commodity-focused equities can perform better in that kind of environment.

Cash also loses value over time when inflation is high, even though the number in the account stays the same. A $1,000 balance buys less as prices rise. Social Security adjustments can provide some relief, but they often trail inflation, especially in areas such as housing and healthcare.

How much to invest in gold — and in what form

Many experts recommend putting 5% to 10% of a portfolio into gold and other assets meant to protect against inflation. If less than 5% of your assets are inflation-resistant, you may not have much of a hedge. But if you put too much into gold, you take on the risk of its price swings. Even though gold is often seen as a safe place during inflation and uncertainty, it can still move sharply in either direction.

Gold bullion is one option, and it can be held in a tax-advantaged gold individual retirement account, or IRA. Gold exchange-traded funds, however, are among the simplest ways to start and do not require physical storage. They can be bought in regular taxable brokerage accounts as well as retirement accounts.

What the inflation surge showed retirement savers

Stocks and bonds both declined during the inflation spike, reminding many retirees that a traditional stock-and-bond mix may not be enough to cover every risk. Energy stocks, commodities, real estate, and gold held up better, offering several ways to reduce losses when inflation is running hot.

Spreading investments across asset classes that respond differently to economic conditions can give a retirement portfolio more protection against inflation and uncertainty.

A simple portfolio check

Investors should review their portfolios on a regular basis, such as twice a year, to be sure they still match financial goals. Those worried about inflation should look at how much of their portfolio is in assets that tend to benefit from inflation or remain stable.

If a portfolio is heavily tilted toward stocks and bonds, it may be vulnerable to future inflation spikes. Adding gold, commodities, and other inflation hedges can help. There is no need to rebuild an entire portfolio, but setting aside 5% to 10% for these types of investments could make a meaningful difference if another inflationary year arrives.