The prospect of running out of money in retirement is a scary one to say the least. According to the Transamerica Center for Retirement Studies, 42% of retirees say their top financial concern is covering day-to-day expenses.

If you’re still working on building up your retirement savings, you have to be on the lookout for anything that could derail your plans. One of the sneakiest retirement killers also happens to be the one people tend to think about the least: inflation.

How inflation eats away at your retirement income

Inflation is something that affects all Americans. When inflation is low, people are encouraged to spend more because their dollars go further. Prices don’t grow as quickly and when interest rates are also low, borrowing money looks a lot more tempting.

So what does that have to do with your retirement? The fact is, inflation is fluid. It can and does change over time. While inflation is low at the moment, hovering around 1%, it’s averaged around 3% historically. When inflation is high and prices are on the upswing, that can take a big bite out of your spending power in retirement.

When you retire, certain expenses are likely to go up while others might go down. Unless you happened to be blessed with perfect health, medical care is something you’re likely going to spend more on as you get older. The Bureau of Labor Statistics estimates that 55- to 64-year-olds spend an average of 8.8% of their household income on healthcare each year. By the time they reach age 75, the average healthcare spending creeps up to 15.6%.

Over the past few years, healthcare prices have increased by more than 6% annually, a trend that looks set to continue in the future. If your spending is increasing out of necessity because inflation is making healthcare or other expenses rise in retirement, it’s your retirement income that pays the price.

Research from LIMRA Secure Retirement Institute measures just how significant the impact can be over time. Over a 20-year period, a 2% inflation rate would create a shortfall of more than $74,000. When inflation climbs to 3%, retirees stand to see more than $117,000 of their investment earnings go up in smoke.

Cost-of-living adjustments from Social Security are designed to help retirees cover the gap when inflation rises but when inflation is low, the government isn’t as quick to increase those benefits. The result is that you’re stuck trying to make your retirement savings keep pace with prices that may be rising at a rate that’s higher than the returns you’re earning.

What can savers do to combat the effects of inflation?

While there’s nothing you can do directly to change the inflation rate, you don’t have to take its impact on your retirement lying down. Putting some simple strategies to work can help you offset the way inflation affects your savings over time.

Keep your investments on an even keel. No matter how big or small your retirement account is, you need to make sure your portfolio is properly balanced. Basically, you don’t want to put all of your eggs into the same basket. Making sure you’ve got a good mix of stocks and bonds can help you stave off inflation’s reach and protect you against volatility if the market tumbles.

Mix it up with something new. Stocks and bonds are staples for most investors but they’re not the only way to insulate yourself against inflation. Real estate can be a great way to keep your earnings from being eroded by rising prices. If you want to go the direct ownership route, house-flipping or owning rental properties is one option. If you want something more passive, a real estate investment trust (REIT) may be the better way to go. Either way, you’re adding more diversity and creating a new source of returns to boot.

Stick with low-cost investments. If you don’t know a lot about playing the market, it’s easy to get stuck with higher-fee investments. Those fees take a bite out of your returns, which means you’re making less of a profit at the end of the day. If inflation goes up, your investments have even less purchasing power. Sticking with low-fee options like exchange-traded funds can keep more of your money in your retirement account over the long-term.

Plan ahead for healthcare. Getting older should come as no surprise but you can get ready for bigger medical bills while you’re still young and healthy. If you’ve got a high deductible health insurance plan, stashing money in a Health Savings Account (HSA) is a smart move. You get a tax-break when you contribute and you can pull the money out tax- and penalty-free when you need to pay for healthcare.

Tweak your budget to minimize spending. The last piece of the puzzle in fighting inflation is managing your spending. If you’re younger, dumping your debt is an obvious first step. If you’re closing on retirement and you don’t have as much time to save, downsizing your home may be something to think about. The goal at any age is to get your monthly outflow as low as possible so you’re not having to draw as often on your retirement income later on.

Whether you’ve got a little time to prepare for retirement or a lot, the key to getting around inflation is having a plan. Putting these tips to work may not eliminate inflation’s impact entirely but they can help to soften the blow so your golden years aren’t tarnished.

Tell us about how you are planning for the unexpected in your retirement in the comments below!

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