How to Beat Inflation, the Silent Killer of Your Finances

Investing, Investing Strategy, Retirement Planning
Rear view shot of a young couple watching TV together

By Sam Farrington

Learn more about Sam on NerdWallet’s Ask An Advisor

Warren Buffett, one of the greatest investors of all time, has two rules of investing:

  1. Don’t lose money.
  2. Don’t forget rule No. 1.

With this advice in mind, it’s easy to think that you’d be better off parking your investments in a savings account instead of in the stock market — especially given the recent decline.

But if you think investing in the market is risky, you must consider how risky it is not to invest. This is because of inflation.

The silent killer of your finances

Inflation is the ongoing increase in the prices of goods and services, and it erodes purchasing power over time. It affects all of us. You don’t get a free pass, even if you’ve been a diligent saver or have adopted a high-income, low-expense lifestyle. Inflation creeps up slowly; it can take decades to have a meaningful impact on your financial goals, making it the silent killer of your finances.

Take the example of my family going to the movies. When I was a kid, tickets at the bargain theater cost $1. Today they cost $3.25. The movie theater didn’t make the leap from $1 to $3.25 all in one day — it took nearly 30 years as the price increased incrementally.

The price of a movie ticket might not sound like a big deal. But when you apply inflation to all living expenses, you can see how critical it is that your money grows at least as quickly as inflation does. This is especially true for retirees who have income tied directly to their savings. If your money doesn’t keep up with inflation, your retirement savings won’t go far enough to cover your steadily rising expenses.

How to beat inflation

Historically speaking, our money must grow by around 3% on average each year just to retain the same value in the future. Some years there might be little to no inflation, as in 2015 when it averaged 0.1%. But in 1990, for instance, the average was 5.4%.

The longer inflation is at work, the more likely you are to notice it. And if you don’t plan for it, you eventually might find that you didn’t save enough, invest enough or take enough calculated risk to reach your financial goals.

Unfortunately, this realization often comes when investors don’t have the time to make up the shortfall. To make sure your money has a chance to grow enough to keep up with inflation, keep these tips in mind:

  1. Maintain some stock exposure

Playing it “safe” with all of your retirement savings is risky. Even investors with a lower risk tolerance possibly could benefit from at least some stock exposure. This gives you the potential to have a small portion of your investments increase with inflation.

But this doesn’t mean you need to invest all of your money in stocks. The proper balance of stock exposure for your risk tolerance is necessary to make sure you can stomach any volatility without jumping ship. A good financial planner can help you determine the proper mix of stocks and bonds to stay the course.

  1. Stay in the market

One way to increase potential returns, which improves your chance of beating inflation, is staying invested in the market.

Nobel laureate economist William Sharpe concluded in his research that “unless a manager can predict whether the market will be good or bad each year with considerable accuracy (e.g., be right at least seven times out of ten), he should probably avoid attempts to time the market altogether.”

Individual investors are likely to increase returns by sticking to a passive investment strategy and staying invested. Those who attempt to cut their losses — and end up getting out at exactly the wrong time — can find themselves with returns that are much lower than they would have been had they stayed in the market.

Instead, investors should use a predetermined investment strategy that indicates when to buy or sell investments. This can take the emotion out of these decisions.

  1. Wait to claim Social Security benefits

Delaying the collection of Social Security benefits until you are 70 is a great way to increase your retirement income and combat inflation. If you’re married, the strategies can be complex, so have a financial planner analyze your situation. But in general, the higher-earning spouse might consider waiting to collect benefits until age 70. This allows that person to max out his or her own benefits, as well as any benefits the lower-earning spouse would collect if the higher-earning spouse passes away first.

You earn an 8% increase in your benefit amount each year you delay collecting Social Security benefits from full retirement age to age 70. If your full retirement age is 66, then you have the potential of increasing your monthly benefit check by 32% if you wait to collect until you turn 70. Once again, meet with a professional to determine what makes sense for your situation.

  1. Exercise regularly

What does exercising have to do with inflation? Health care costs are rising dramatically, even faster than inflation. Exercising and eating healthy can help you beat those increasing costs. A healthy lifestyle also can boost your self-esteem and confidence, which can positively affect your performance at work and increase your earning potential.

False sense of security

You might feel a sense of comfort in knowing your savings account or the stash in your cookie jar won’t lose money. After all, you are following the advice of Warren Buffett. But the long-term effect of inflation could potentially cause your “safe” investments to be losing propositions.

It’s well known that when you make an investment in the stock market, you are taking a risk. But when you stay out of the market and choose not to give your savings a chance to beat inflation, you also are taking a risk that is harder to see — maybe until it’s too late.

Plan ahead

It’s impossible to know how much inflation will affect the buying power of your savings decades in the future. But it certainly will affect you, so plan for it. If you are unsure whether you’re on the right track, it might be beneficial to find a fiduciary financial advisor who can assist you with investing and retirement planning based on the level of risk that is right for you and your family.

Sam Farrington is a fee-only financial planner and founder of Sound Mind Financial Planning in Omaha, Nebraska.