You’re probably familiar with the idea of factoring inflation into your retirement investment goals. You have to make certain that your portfolio will make a reasonable accommodation for inflation as of the date that you will retire.

But inflation won’t stop after you retire. You’ll have to continue dealing with it for the rest of your life. It’s not an exaggeration to say that your retirement portfolio must continue to grow throughout your life. This is even more important by the fact that you will not be able offset inflation through a higher salary – you‘ll be retired. It will have to be dealt with through your retirement investment portfolio.

Since inflation, even at a low rate, slowly and relentlessly eats away at the value of your portfolio, you’ll have to do your best to make sure that your investments grow at rates that are at least equal to or better than the rate of inflation.

How can you keep up with inflation when you retire?

Keep A Large Slice Of Your Portfolio In Stocks

There’s a school of thought in the retirement world that has you making a massive shift from stocks into fixed income investments once you retire. It’s true that you’ll have to increase the fixed income allocation, but you’ll still have to maintain a large percentage of your portfolio in stocks.

Since fixed income investments do little more than keep you even with inflation, you’ll need to keep growing your portfolio to account for the withdrawals you’ll be taking out. Stocks will be the only way to do that with the largest percentage of your portfolio.

There are two kinds of inflation. The more damaging version is the kind that we experienced in the 1970s and early 1980s. Stocks didn’t perform so well during that time, perhaps because the economic stresses caused by high levels of inflation also had a negative effect on publicly traded companies. We can probably expect a repeat of that dismal performance by stocks in the event that inflation accelerates substantially.

But the second type of inflation – the slow, predictable kind we been experiencing for the last 30 years – is where stocks do particularly well. From 1982 through 2012 for example, stocks as measured by the Dow Jones Industrial Average increased by a factor of nearly 20. That alone makes a compelling reason to keep a large portion of your portfolio in stocks, even in retirement.

There may be times when you’ll have to reduce your stock position, and other times when you’ll need to load up. But abandoning stocks in retirement could prove to be a strategic error.

Treasury Inflation Protected Securities (TIPS)

There’s no question you’ll want to move a larger percentage of your portfolio into fixed income assets. But it’s important to realize that where inflation is concerned not all fixed income assets are the same.

Treasury Inflation Protected Securities, or TIPS, are United States government securities that not only pay interest, but also adjust the principal in accordance with the Consumer Price Index. You will not only receive interest income, but your principal value will be protected from the ravages of inflation. TIPS should be a logical investment choice for a big slice of your fixed income asset position in retirement.

Keep At Least A Small Position In Commodities

Not all commodities perform well during periods of inflation. Historically, the two star inflation fighting commodities are energy and gold. Both tend to do extremely well during periods of high inflation, though either can be lackluster or worse during times of relatively low inflation.

For this reason, you will want to keep your position in commodities limited to a small percentage of your portfolio. The small position will not hurt your returns significantly during low-inflation, but either commodity could perform spectacularly should inflation accelerate.

You can hold either commodity in either an exchange traded fund or a mutual fund. This is better than buying the actual commodity (as can be case with gold), because you will not have to worry about physical custody and, more importantly, so that you can diversify across the sector.

A Home Is An Excellent Long-Term Inflation Bet

The recent downturn in prices notwithstanding, historically real estate has done quite well with inflation – both the slow kind and the more extreme version. Much like stocks, real estate is a very long-term investment that tends to rise steadily over time.

You can have your real estate allocation covered by owning your own home. While rising home values may not offer much inflation protection on a year-to-year basis, they can provide a substantial influx of capital should you decide to sell your home several years into retirement.

We can never know what future price levels will be, but if you enter retirement with a solid balance of stocks, TIPS, commodities and your own home, you should be well prepared for whatever inflation might throw at you after you retire.

What do you think are the best ways to deal with inflation after you retire?