• Question
  • What are some good inflation hedges to improve my retirement income?

    Asked by someone from San Francisco, CA on 2/12/2013

    What are some good inflation hedges to improve my retirement income? I'm concerned that the US dollar will weaken over time and my buying power will decrease significantly.

  • Categories: Retirement Planning, Inflation and COLA


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  • This is a good question, because most investors do poorly in times of high inflation. Many think gold is the answer, but gold isn't always a hedge against inflation -- and it doesn't pay a dividend!

    Some of your options are:

    On the safer side, hybrid annuities now offer inflation-adjusted single or joint lifetime incomes. The way these work is an investor puts a lump sum into a hybrid annuity contract with a living benefit. The annuity guarantees the investor a minimum rate of return (for lifetime income purposes) up to the point where the investor is ready to draw. Once the income begins, every year the annuity carrier will look to see if there was an increase in the CPI and increase the monthly income. Decreases in the CPI do not cause the monthly income to drop.

    During periods of moderate inflation, stocks works best. Under high inflation, I would look for inflation adjusted bonds and floating rate bonds -- bonds where the dividend increases when inflation rises.

  • Login to rate this answer:   Answered on 2/21/2013
  • Steve 


    San Francisco, CA

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  • Good question - historically some of the asset and investment hedges people have used have included hard assets like real estate and commodities since those things have intrinsic value. Investors also tend to shift towards equities if they expect inflation as well, since companies can often raise their prices to respond to inflation. On the flip side being a creditor/lender with a fixed interest rate is not great situation to be in since if there is inflation - you will be paid back with less valuable dollars in the future (dollars that have a lower "real" value since they have less purchasing power of real goods and services since prices have risen - as reflected by inflation.)

    Side note - traditionally owning a house and using debt (a mortgage) has been a great way to build wealth and hedge against inflation, since:
    - you have the hard asset - the house
    - you are using debt to finance part of the house and in recent history inflation has helped make paying that debt off easier (assuming you are working and converting your human capital into dollars)

    Some other reading:
    One of our moderators has a good discussion of inflation indexed annuities for income here: http://blogs.newretirement.com/2008/04/19/inflation-adjusted-immediate-annuity/

    The Wall Street Journal has an article on inflation hedges here: http://online.wsj.com/article/SB10001424052748704662604576256912139434434.html

  • Login to rate this answer:   Answered on 2/12/2013
**All above answers are provided as general information only. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or CERTIFIED FINANCIAL PLANNER™ as to your unique financial situation.