Inflation, sequence of returns, unexpected early retirement, and long-term care costs pose serious risks to today’s retirees. At the 2026 Morningstar Investment Conference, I talked about those retirement shocks with Dana Anspach of Sensible Money and Michael Finke of The American College of Financial Services. Today’s excerpt from that panel focuses on inflation and how to prepare for it.

How to Account for Inflation Shock in Your Retirement Plan

Christine Benz: I wanted to start with one that’s top of mind for many people, certainly retirees, which is inflation, and that we’ve seen higher costs. Dana, I’d be curious to get your experience with clients through inflationary periods. You’ve observed in the past that you don’t see your clients necessarily requiring spending increases in line with inflation. Can you talk about that?

Dana Anspach: We do see people follow the pattern of go-go, slow-go, no-go. And so, in the go-go phase, often, spending is high, and we’ve planned for that. We built in extra spending, and we’re taking a set of baseline expenses and assuming it’s going to go up each year, typically 3% for living expenses, 5% for healthcare-related expenses. All of that is baked into their cash flow planning, the amount of money we say that they’re going to need each year. But where I often see people not needing the inflation increases is in the slow-go phase.

They will travel and do a lot of extra things in the first five, sometimes 10 years of retirement, but usually around the mid-70s, people do slow down, and we’ll say, “All of your plan metrics look solid. We have an inflation raise built in. We can increase your direct deposit from X to X.” And they’ll say, “You know what? I’m not even spending what you’re sending already.” And so that is not uncommon for us to hear in those later phases of retirement. I would say in the earlier phases, especially the past few years, people are like, “Yes, I’ll take that.” And so, we increase their direct deposits, and it’s very reassuring for them to know that that’s already built in and part of the plan.

The Scenario Where You Might Have to Save 20% More

Benz: I’d like to talk about sequence of inflation risk because we often talk about market returns in the context of sequence risk. Michael, can you talk about when inflation occurs in someone’s retirement lifecycle and how much that matters? Wade Pfau has described that as sort of another form of sequence risk.

Michael Finke: It is. Let’s imagine two scenarios, both of which have exactly the same average inflation in retirement. One, you have inflation of 5% per year for the first five years and then 2% for the remainder of retirement. The other scenario, you have 2% inflation for the first 15 years and 5% for the last five years. In the first scenario, you have to save up almost 20% more for retirement because when prices go up earlier in retirement, they remain high for the remainder of retirement. And as Dana’s pointing out, you tend to spend more early on in retirement. If you get hit early on in retirement with high inflation, which a lot of recent retirees have, and who knows what’s going to happen in the future, it’s every bit of a risk as market risk. And just like market risk, it tends to be most acute and matters the most early on in retirement.

The Best Way to Hedge Against Inflation Risk to Your Retirement Portfolio

Finke: Let’s take a moment and talk about the best way to hedge against inflation risk because I feel like I need to get on my soapbox here and say the same thing I do over and over again, especially for healthy, higher-income workers. The single best way to hedge against that risk is to delay claiming Social Security. It is for, let’s say, mass affluent retirees for whom Social Security still represents a decent percentage of their spending. Delayed claiming of Social Security is really the most reliable way to get both inflation protection and longevity protection. And you can bridge that with investments during that period, and you can even bridge it with a lot of investments during that period.

You don’t have to reduce your spending by delaying claiming Social Security because you can actually spend more throughout retirement. But to me, that’s one of the most underutilized strategies. And even with all the negative news we’ve heard about Social Security recently, it still makes sense even in a worst-case scenario, which is never going to happen politically.

Annuities: You Can Make an Inflation Adjustment Yourself
Benz: I want to follow up on that, Michael, because I’ve heard Social Security explained as kind of the best annuity that money can buy because it has that built-in Consumer Price Index adjustment, it has all of those beautiful features. But if you’re to buy an annuity, you cannot get an annuity with a CPI adjustment, and that’s often kind of trotted out as a reason to not annuitize. Can you address that? Because I know you’re a fan of annuities, but what about the inflation rate?

Finke: Sometimes I’ll hear people say that, and I’ll ask them, “Well, what does your bond portfolio look like?” And they’ll say, “Well, maybe it’s 5% TIPS or 10% TIPS or no TIPS.” And I’m like, “Well, you don’t have the inflation adjustment in your bond portfolio. Why would you expect an insurance company that is investing in the same types of corporate bonds to be able to offer that type of inflation adjustment?” You can make an inflation adjustment yourself if you want to by, say, starting out with a base of income and then you can have a delayed annuity that begins at the age of 85, maybe have another one that begins at the age of 75. You can create an upward-sloping spending path with your lifetime income. However, it’s not very practical for insurance companies to offer that inflation protection unless they’re creating annuities using Treasury Inflation-Protected Securities, and those tend to be very expensive.

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