How to Beat Inflation – 14 Strategies for Growing and Preserving Wealth (2024)

Inflation affects all of us; it erodes the value of your money. When prices go up, your purchasing power goes down.

Inflation can be even more of a problem when wages are stagnant. Many expect monetary policymakers to do something to slow the pace of inflation.

As inflation erodes your purchasing power, it becomes necessary to protect yourself. Some people preserve their capital with inflation-protected securities. Others look for stock market gains to help overcome inflation’s ravages.

It’s also possible to start a business, cultivate passive income, and buy items with a long shelf life at today’s prices to reduce their average costs.

Inflation has been quiet for a very long time. Other than periodic spikes in energy prices, inflation has been more a matter of speculation than reality.

Prices have generally tended to be predictable, which has benefited both consumers and businesses.

But there are some signs that inflation may be about to return. If it does, how should we prepare?

Why Higher Inflation May be on the Way – And What to Do About it

Since the early 1980s, central banks worldwide have been working to squeeze inflation out of the economy. Disinflation is the process of lowering the inflation rate, and since the policy was implemented, inflation has declined from double digits to single digits.

We could say mission accomplished! Unfortunately, economic prosperity is a dynamic, not a destination, and central bankers can rarely rest on past accomplishments.

One of the recent fears is that disinflation would eventually succumb to deflation, which is an entirely different and less holy outcome. Under deflation, wages, asset values, and general price levels decline. While that may seem like a positive development, it’s a recipe for an economic depression.

It was the driving force that launched the Great Depression in the 1930s. The problem with deflation is that it feeds on itself and turns ugly. That’s what central banks want to avoid.

There are indications that central banks may be about to reverse course and let a bit of inflation into the mix. Inflation, it’s thought in certain quarters, might remedy what ails a very sluggish economy.

Are we ready for the change?

Estimating Future Inflation

Estimating price levels in the future is impossible to do with any precision. There are a lot of variables, including times of relative price stability and others of rapidly rising prices. To invest effectively, it’s necessary to make some sort of reasonable estimate as to what price levels will be by the time you retire.

Let’s say that you’re 35 years old, and you plan to retire at age 65. That means you will have to project where price levels will be in 30 years. No tool can provide an accurate picture of the future. But we can look back and see what inflation has done to the value of a dollar over the past 30 yearsand use it as a loose guide.

You can do this using the Bureau of Labor Statistics Inflation Calculator. It’s a simple tool in which you enter just three numbers – the dollar amount, the starting point year, and the current year.

By entering “1986” – to cover the past 30 years – and then $1,000, we find that in 2016, it will take you $2,191.93 to buy the same amount of products and services that $1,000 bought 30 years ago. Let’s round that up to an even $2,200 and say that whatever money you save for retirement in today’s dollars will need to be multiplied by 2.2 to cover estimated future inflation.

In that scenario, if you believe you will need $1 million in today’s dollars to support your retirement, your savings target can be $2.2 million to account for the effects of inflation between now and then.

Inflation and Your Income

This could play out one of two ways. If wage growth reacts quickly to higher inflation, consumers may be in a position to increase spending.

That will increase demand and hopefully begin creating new jobs too. On the other hand, if wages continue to run behind the price curve, higher prices could quickly overrun salary increases.

If that happens, the economy could slow even more.

We probably should expect the second scenario to play out. High unemployment leads to a doubtful starting point for higher wages.

Now would be an excellent time to cut living expenses in anticipation of higher inflation. In particular, we should be hesitant to take on any new expenses or financial entanglements, at least until we get a clear idea as to which way the wind is blowing.

Inflation and Your Debt

Inflation usually translates into higher interest rates. That makes a strong case for 1) locking in interest rates while still low and 2) converting variable-rate debt to fixed-rate debt as soon as possible.

If inflation is coming, we should no longer bank on a continuation of the meager interest rates we’ve reliably had over the past few years.

Inflation and Your Mortgage

This may be your last chance to lock in the lowest mortgage rates in history. If you haven’t done so recently, the prospect of higher inflation should be a siren call to refinance your mortgage.

Throw the election in with the possibility of higher inflation, and we could be looking at substantially higher mortgage rates a year from now.

Inflation and Your Investments

Since higher inflation will mean higher interest rates, the impact on your investments could be substantial. Here is how inflation can impact some common investments:

Because interest-bearing investments compete with stocks, rising interest rates may not bode well for stocks. For example, resource stocks may benefit from higher inflation.

Fixed income assets. This is probably not a good time to commit your money to a five- or ten-year certificate of deposit or Treasury note. You’ll be tying up your capital at meager rates of return while higher returns will be available.

Money market funds and very short-term securities may not pay much interest, but they’ll keep your cash free to take advantage of higher rates later.

Commodities. Energy, in particular, tends to benefit from inflation, but other sectors may also present opportunities. Construction materials, precious metals, and rare industrial commodities may also benefit.

Investing for Inflation After Retirement

One of the complications in accounting for inflationin connection with retirement is that inflation will not stop once you retire. And with people typically living into their 80s and 90s, your investment money will have to cover your living expenses for another 20 or 30 years after you retire. Inflation will continue to be a factor.

You will have to assume inflation will continue throughout your lifetime. That means you will have to be fully prepared to reinvest at least part of your investment earnings into your portfolio to account for higher price levels in the future.

This raises the question of how much money you should withdraw from your retirement portfolio.

Thesafe withdrawal rate offers some guidance here. The theory holds that if you withdraw no more than 4% of the balance of a well-diversified retirement portfolio, you’ll never run out of money.

The safe withdrawal rate means that your average annual return on investment will need to be greater than 4% per year once you retire. So if you determine that a 3% annual inflation factor is a reasonable estimate, you will need to earn 7% on your portfolio each year.

You can safely withdraw 4% each year for living expenses, while the remaining 3% is reinvested to keep your portfolio adjusted for inflation.

It’s important to realize that your investments won’t hit 7% yearly. But that does need to be your average. There may be one year in which you earn 10%, another year only 3%, and another in which you lose 4%. That’s okay, as long as your average return hits the target over a long time.

Best Investments to Cover The Impact of Inflation on Your Portfolio

Interest-bearing investments, likecertificates of deposit, used to be the mainstay of retired investors. They provided a steady income flow and protection of principal value. But with today’s microscopic interest rates, fixed income investments alone will not provide for retirement. You cannot live on a 1-2% return on your money and have enough income to live on and cover for inflation.

Historically, stocks and real estate have been the best investments to counter inflation, particularly the persistent, low-level variety we’ve had in recent decades.

Stocks have returned an average annual rate of return above 10% since 1928.

The situation is similar with real estate. However, as many retirees don’t want to be involved with owning and managing rental properties, you may want to look closely at real estate investment trusts or REITs. They invest in real estate either through direct equity participation or by providing mortgages. They have earned anaverage annual return of 10.6%, putting them in the range with stocks.

But since stocks and real estate carry a higher risk than bonds and other interest-bearing investments, you shouldn’t have 100% of your money invested in them. Instead, you want to achieve a blend that will provide you with the needed return rate and a measure of safety.

Let’s take a look at a sample retirement portfolio that could historically keep pace with inflation:

Say you decide you need a 7% annual average rate of return on your portfolio once you retire. By investing 67% of your portfolio in stocks and real estate, and 33% in interest-bearing investments you can reach 7%. That will give you a return of 6.7% on stocks and real estate (67% X 10%) and 0.33% on interest-bearing investments (33% X 1%), for a total average return of just over 7%. (keep in mind this is an example, not a guaranteed return).

Depending on your current investment portfolio and future retirement needs, you may need even higher returns to reach your retirement goals. That means you would need to put a larger percentage of your portfolio into stocks and real estate.

How to Beat Inflation

Over the long term, prices tend to go up — and the purchasing power of your dollar tends to go down. It’s the way with a fiat currency: Over time, your purchasing power will decline, and you’ll need more dollars to pay for the same product or service.

Just look at this historic inflation calculator for an example of how the dollar’s purchasing power has eroded over time. You need some core strategies to beat inflation and protect the purchasing power of your wealth.

If you are wondering how you can offset the inevitability of inflation, here are 14 strategies you might employ:

1. Treasury Inflation Protected Securities (TIPS)

This is one of the most straightforward — and possibly the safest — strategies for offsetting inflation. Treasury Inflation-Protected Securities (TIPS) are special bonds periodically adjusted to keep pace with inflation. While you probably won’t earn a huge return, your money will be backed by the U.S. government, and your purchasing power will be preserved.

I-bonds are another inflation-protected Treasury investment that can help you beat inflation. However, it is important to realize that, like all bonds, the possibility of default is still there.

2. Index Funds

Given a long enough period, past performance indicates that the stock market does not lose. (Although there is a first time for everything, you are still at risk.)

Keep in mind that the markets rise and fall, so we are talking about long-term investments, not money you will need in a few months or years. Indeed, the overall stock market offers inflation-beating returns over the long haul.

However, individual stock picking does not provide the same potential for success. You can take advantage of the power of the entire stock market with index funds and ETFs that follow the market.

Fees are low; if you wait long enough, the returns should help you outpace inflation.

3. Commodities

If you can stomach the volatility and the risk associated with investing in commodities, you might be able to stay ahead of inflation. People will always need commodities, so due to that demand, commodities are inflation sensitive.

Investing in them can put you ahead in the long run. You can limit some of your risk with the help of commodity ETFs.

4. Start a Business

You can keep up with inflation by adjusting prices if you provide products and services. The downside is that customers may not be happy with your rising prices.

However, with slight adjustments when it comes time to renegotiate, creating a revenue stream that paces inflation should be possible. This can be a boon in a world where wages from “the man” are less likely to keep up with inflation.

With a little help from the Internet, you can gain the advantages of working from home while possibly staying ahead of inflation.

5. Lock in Higher Interest Rates on Cash Accounts

While this is not likely to happen anytime really soon, it is still worth keeping an eye out for higher interest rates. One of the key reasons for CD laddering is so that you can take advantage of higher rates when they come around.

Keep watch over the interest trends, and lock in higher interest rates on your cash when possible.

6. Lock in Lower Fixed Rates on Debt

If you have debt, now is the time to pay it down. You can reduce the effects of inflation later by getting fixed rates on mortgage and car loans.

With rates as low as they are, you might consider refinancing. And, while you are about it, now is an excellent time to pay down high-interest credit card debt while more of your payment goes to the principal.

7. Invest in Good Businesses with Low Capital Needs

This is one of Warren Buffet’s strategies. He has long advocated investing in businesses that earn high returns on the capital invested in the industry.

During inflationary times, businesses with low capital needs that can maintain their earnings should fare better than those required to invest more money at higher prices just to maintain their position.

8. Avoid Traditional Bonds

With interest rates near historically low levels, bond investors could be hurt significantly in an inflationary environment.

You need to do better than purchasing a 10-year bond yielding 2%.

9. Avoid Gold and Cryptocurrencies.

Invest in productive assets such as stocks or real estate that generate dividends and income for their owners.

Some investors consider cryptocurrencies the digital version of gold, but Warren Buffett is highly skeptical of these.

“Bitcoin has no unique value at all,” he told CNBC in 2019. “It doesn’t produce anything. You can stare at it all day, and no little Bitcoins come out or anything like that. It’s a delusion, basically.”

10. Reduce Your Expenses

This sounds like a no-brainer, but many people fight the notion of downsizing when things cost more.

You may be able to offset some of an inflationary increase in your expenses by taking a closer look at your bills and making hard choices by cutting what you don’t need. From there, try to reduce or negotiate the rest.

Everyday bills that could be cut or reduced include:

• Recurring subscriptions
• Phone
• Internet
• Car insurance
• Homeowners’ or renters’ insurance
• Food bill
• Energy bill

11. Make Tax-efficient Investments

Try to maximize tax efficiencies on all your investments by adopting different tax-efficient investing strategies. For example, put assets that lose a smaller percentage of their returns to taxes in taxable accounts or put assets that lose a higher percentage to taxes in tax-advantaged accounts.

12. Don’t Invest in Companies with High Labor Costs

During inflationary periods, companies that depend on their workforce (i.e., healthcare and retail) try to raise wages to retain and attract employees. Growing wages encourage even higher price increases, creating a spiraling inflation trend.

13. Research Past Inflation Trends

Those who forget the past are doomed to repeat it! Researching past high inflation trends can help you identify many current and future inflation patterns.

Pay attention to commodity stock performance, energy sector stability, and the performance of real estate and other alternative asset classes.

14. Reduce or Eliminate Your Variable-rate Debt

Credit cards and variable rate mortgages can cost you in inflationary periods. Paying it down, paying it off, or consolidating it into lower fixed-rate debt can lessen inflationary impacts.

The Federal Reserve has been raising interest rates and is likely to do so again, meaning the cost of variable-rate debt will continue to increase.

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