Inflation and retirement: Here's how retirees can navigate rising prices

To figure out if a client has enough money socked away for retirement, Stephanie McCullough, founder and chief executive of Berwyn, Pa.-based Sofia Financial, runs a computer program to calculate and stress test individual situations, including scenarios with higher inflation.

“For so long the default inflation assumption of the software program I use was 2.25%,” McCullough said. “I have the ability to move it higher, but it doesn’t go anywhere near as high as 7%,” where the latest reading on consumer prices clocked in.

“Even at 4%, when you’re looking at 20 to 30 years in retirement, that can really get you,” she said.

And that’s the hitch with being a retiree on a fixed income — it's typically a set income stream. But living expenses climb with inflation, so investment income must do so, too.

Here’s how retirees should face the highest inflation in 40 years.

Find ways to get lean

McCullough’s mantra for her clients is to live simply.

“It’s not necessarily easy,” she said. “Try to keep your essential fixed expenses as low as possible, so that when things turn against you, whether it be poor investment performance, unexpected medical bills, or higher inflation, you can pare back the discretionary spending to stay afloat.”

“The less we need, the more sustainable our retirement,” she added.

Don’t be too risk-averse

It may be counterintuitive, but “the anxiety over inflation actually argues for making sure your investment strategy is not too conservative,” McCullough said. “Because over the longer time frames, the stock market does a better job of keeping up with inflation than more conservative choices.”

Even what she describes as a “moderate portfolio” — 60% stocks and 40% bonds — historically has kept up and even surpassed inflation,” she said.

Danielle Howard of Wealth by Design in Basalt, Colo., agreed. With the Federal Reserve set to raise interest rates, though, “clients need to understand that a bond portfolio has more inherent risk right now for retirees who thought they were supposed to move to more fixed income in retirement,” Howard said. “The combination of inflation and rising interest rates will be painful.”

How to stick with stocks

There are a variety of ways to “tweak based on each personal situation,” Howard said. “There is no pat answer that is a fit for all. It can be everything from a shift to more dividend producing large cap stocks, alternative investments, or annuities distributions that address fixed expenses.”

That doesn’t mean someone needs to cherry pick individual stocks. A Standard & Poor's 500 index fund, an Exchange Traded Fund that tracks the S&P 500 or a total U.S. stock market index fund can provide the growth needed to keep pace with inflation.

Many S&P 500 stocks also pay dividends. So unlike bonds, they provide a twofer: On top of investment returns, they also provide income with cash dividends (the S&P 500's dividend yield, however, is now a paltry 1.27%, compared to 1.38% last month and 1.55% last year. This is lower than the long-term average of 1.86%).

Go brick-and-mortar, sort of

The key is to “stay invested,” said Rob Williams, managing director of financial planning, retirement income and wealth management at Schwab Center for Financial Research.

Real estate investment trusts or REITS (stocks of companies that own or manage properties) are attractive as a way to buttress inflation, Williams said. And that includes ETFs and mutual funds specializing in real estate securities.

Currently, the average REIT dividend yields about 3%, nearly twice the average yield on the S&P 500. However, some REITs offer even bigger dividend yields of around 4% to 5%, Williams added.

I-Bonds to the rescue

Investing in I savings bonds can be a smart move for non-retirement accounts when the cost of living skyrockets. There’s a minimum electronic purchase of $25, and they are now paying 7.12%.

Plus, I bonds are guaranteed to keep pace with inflation. They earn interest for 30 years or until they are cashed in, whichever comes first. If they’re cashed in before five years, however, the interest from the previous three months is lost.

To learn about how to purchase savings bonds, go to TreasuryDirect.

Delay Social Security

Finally, if you’re between 62 and 70 and haven't started taking your Social Security benefit, wait if you can. Social Security's rules essentially give you an 8% bigger benefit for each year you defer claiming benefits after your Full Retirement Age (currently 66 to 67), until age 70. Put another way, if you're now 66 and wait until 70 to start claiming, you'll see 32% larger benefits than if you filed at your Full Retirement Age.

“It’s not all doom and gloom,” said Phil Michalowski, head of annuity products at MassMutual. “But retirees should reassess their assets, risk exposure, expenses, and how much retirement income they ultimately need. Those near retirement may choose to work a little longer.”

If possible, find a fee-only financial adviser, who is also a fiduciary — a professional required to put your interests first, to help navigate the new economic landscape. This kind of an adviser will take a big-picture approach to guide your financial life in retirement and calm your nerves.

Kerry is a Senior Reporter and Columnist at Yahoo Money. Follow her on Twitter @kerryhannon

Read the latest personal finance trends and news from Yahoo Money.

Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard, and LinkedIn.