How to protect your retirement portfolio from inflation

Chances are, you want to continue your current standard of living well into retirement. But there's a silent force working against you: inflation. With the annual inflation rate in the U.S. surging to 6.2%1 in October of 2021, you may feel as though your retirement plans are under attack.Fortunately, there are steps you can take to protect your retirement portfolio from inflation.

Review your portfolio allocation

As people get close to retirement age, they typically shift more of their portfolios into fixed-income investments. This helps to protect against stock-market volatility. If you're close to retiring, talk to your financial advisor about whether you should put some of those fixed-income investments in Treasury Inflation-Protected Securities (TIPS).

TIPS are bonds where both the principal and the interest rate rise along with inflation and fall with deflation.2 They're also low risk because they're backed by the full faith and credit of the U.S. government.

But they're not fool-proof inflation protection. That's because inflation rates and durations are impossible to predict with certainty. Yes, TIPS have an edge over traditional bonds when inflation is high. But they perform poorly compared to regular Treasury bonds when periods of low inflation or deflation. In those situations, their par value and interest payments shrink, and TIPS fail to keep up with market interest rates.3

Still, if you believe inflation will continue to rise, then it may make sense to create an inflation hedge in your portfolio. This could be a strategy worth considering, even if it means accepting lower yields today in exchange for higher payments in the future. However, TIPS are a complex investment and you need to be sure you understand all of the complexities of the product prior to investing.  

If you have more time to ride out the economy's ups and downs before retirement, you may want to talk to your financial advisor about investing in different asset classes to help offset the impact of inflation on your portfolio.4 

Consider working longer

Working into your retirement years can protect your retirement from inflation in several ways.

First, working longer allows you to continue collecting a salary and benefits that rise along with inflation. Second, it gives your retirement savings more time to grow since you can delay living off of your retirement savings. Finally, it allows you to delay collecting Social Security benefits. While you can begin receiving Social Security as early as age 62, your benefit amount will be reduced if you don't wait until your full retirement age. (That age is 67 for people born in 1960 or after.) On the other hand, if you delay benefits until age 70, you can increase your benefit amount.5

The benefit increase depends on the year you were born. For example, for someone born in 1943 or later, for each year they delay claiming Social Security benefits after full retirement age, benefits increase by 8.0%. But the benefit increase stops once you turn 70.

Your Synovus financial advisor can help you calculate how much more you can expect to receive in Social Security benefits by delaying retirement.

Pay off your mortgage (or refinance into a fixed rate)

Paying off your mortgage can be like earning a risk-free return equal to the interest rate6 you're currently paying.

Paying off your mortgage before retirement can also reduce your monthly expenses. This allows you to live on less and enjoy greater financial flexibility in your retirement years. Even if inflation chips away at your income in retirement, at least you don't have to worry about using a big portion of that income on mortgage payments.

If you're not planning on paying off your mortgage early, consider refinancing from an adjustable-rate to a fixed-rate mortgage. This protects you from the rising interest rates that tend to accompany higher inflation. With your interest rate locked in for the life of your loan, it won't ebb and flow.