How to Beat Inflation with Your Savings

The internet is rife with hot tips on how to beat inflation.  Since a lot of supposed financial media outlets compete with each other for top billing on Google, the majority of these articles are an incestuous party of underwhelming originality–or even actionability if I'm being wholly honest with you.  The free-lancers who dabble in finance rounded up the usual suspects and found someone with credentials to parrot something related to using them for the purpose of beating inflation.

You'll find brilliance such as:

  • Buy inflation-protected bonds (let's address this one)
  • Reduce your spending (kinda already done for you doncha think?)
  • Buy stocks ('cause there awesome)
  • Buy real estate ('cause ‘merica)
  • Buy vegetables (you're going to love this one)
  • And budget, budget, budget (because nothing solves a problem faster than simply talking about it)

But none of these hastily written articles mention the inflation bunker that is cash value life insurance.  One of them mentioned annuities, but made a vague reference to the evilness of annuities so watch out…and probably don't buy it if it doesn't come with a COLA benefit…whatever that is–I'm not kidding, I seriously don't know.

We'll get to why life insurance might just be one of your best bets against inflation, but first, let's take a more serious look at the a-d-v-i-c-e whose omnipresence can only vouge for its legitimacy.

A Tip on TIPS

You might have heard that the U.S. Government issues bonds that are designed to benefit from high inflation.  You might be intrigued by this given the rising prices we're currently experiencing.  They are exceedingly higher than anything the American Economy has faced in several decades.  In fact, we have to go back to at least the mid 80's to arrive at a time when inflation was this high.

When it comes to government-issued inflation-focused bonds you have two options.  I-bonds (a term not presently trademarked by Apple, Inc…technically they are called Serious I Savings Bonds) and Treasury Inflation-Protected Securities (TIPS).

Each option has a unique array of features and consequences, but both seek to benefit from periods of high inflation.  TIPS are more complex than I-bonds.  I-bonds are essentially savings bonds with an inflation adjustment applicable.  TIPS, on the other hand, can experience numerous adjustments (both positive and negative) based on the movement in the Consumer Price Index (CPI).

Both options can act as a decent hedge against inflation, but if you bet wrong on inflation, you could end up either locking yourself into a long-term poor performer (in the case of I-bonds) or potentially face selling the position well below expectations or a loss (if not held to maturity in the case the TIPS).

Spend Less, Suffer More

I'm not joking just about every article written in the past month or two seeking to dole out advice on how to successfully wade through muddy inflationary waters recommended cutting back on spending–I'm not so sure these writers understand what inflation means.

Perhaps this is a function of my formal training in Economics and my strong familiarity with indifference curves, but if prices go up, you will ultimately buy fewer things.  That's not done by choice–or perhaps I should say preference.

Buy Stocks Because they Beat Inflation

The U.S. Stock Market is amazing (Note: you might be looking for the sarcastic punchline here, but I'm being serious).  It has created vast fortunes for many Americans through mutual beneficial appreciation in company values.  It will, most likely, outpace inflation long term.  But in the interim, the stock market is a sucker's bet if we're about to enter a period of high inflation.

You might benefit from a short boost in values while buying activity is hot (I think the trade for that expired late last year).  Now, we face the coming setback generated when the Fed puts the punchbowl away.  Stock prices will fall if the Fed raises rates.  Buying into stocks before the Fed takes action to combat inflation is a good way to ensure you have something to complain about at your next social gathering.

Buy Real Estate

We Americans are obsessed with real estate.  We like to pretend that it's the ultimate way to build wealth.  For some, it is.  For many, it's not.  But real estate has to be one of the most precious investments in times of high inflation.  The number one tool to combat inflation–interest rates–controls the most critical conduit through which the majority of Americans buy real estate–credit.  If rates go up, the amount of real estate one can buy through credit goes down.  Less buying power puts a real damper on demand–remember it's the willingness and ability.

The Answer is Kale

I kid you not one article suggested that swapping meat, which apparently has risen in price faster than most vegetables, for a vegetarian dish was a smart way to deal with inflation.  While I'm not entirely sure what the cross-price-elasticity between meat and vegetables is, I do know that most vegetables have a rather short shelflife.  So perhaps the real winner here is Bob Vance.


Telling people who are facing scary or insurmountable challenges that they just need to get more organized is never helpful…never.

Life Insurance

Life insurance offers two unique and exceptional qualities in the face of inflation.

One it cannot go down in value.  So whatever the Fed does, and however the market reacts is of no concern to your life insurance policy value.  It will remain at whatever level it's at–plus earn whatever guarantee it has contractually tied to it.  And on top of that, probably earn some non-guaranteed component as well.  Despite some pretty dark economic times, whole life policies have continued to earn dividends.  Universal life insurance policies have also earned interest beyond the guaranteed amount in challenging economic times.

Second, life insurance contracts benefit from rising interest rates (see the comment made earlier about the Fed's tool for combating inflation).  What is more, life insurance is likely to benefit for many years following an increase in interest rates.  This happens because life insurers rarely–in fact, most of them never–sell the bonds they buy with inevitable assets.  Life insurers have an unrelenting hold-to-maturity investment strategy.  So while many bond funds managers will sell bonds at a capital gain if rates go down, book the investment profit, and then struggle to find yield if rates don't again rise, life insurers alternatively sit on higher-yielding bonds for the duration of their lifetime.

It also offers liquidity and capital in shaky economic times when no one else wants to move.  Uncertain economic times often lend well to opportunities.  But access to necessary capital can prove equally challenging.  Banks might tighten their lending requirements to protect against defaults when economic volatility is high.  Accessing cash value has a proven track record of availability when times are tough.

If Fed tightening to combat inflation sends the U.S. economy into a recession as some are now suggesting, life insurance will stand at the ready for those who own it and need the capital it provides.


2 thoughts on “How to Beat Inflation with Your Savings”

  1. I agree with your opinion that if the Fed raises rates to combat inflation, insurance policies should benefit. What if the Fed doesn’t raise rates or doesn’t do it fast enough and we’re forced to endure a prolonged period of high inflation? I see this as an ever more likely scenario and one in which the purchasing power of insurance benefits is shredded.

    • I can’t really comment because I don’t really know what you intend to mean by prolonged high inflation. How high? How long? What I can say is that what I think you intend to suggest is a scenario the U.S. economy cannot endure nor can any asset predictably endure. The whole point of the Federal Reserve Act was to stop the very circumstance I think you are suggesting.


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