Americans got some welcome news last week that inflation slowed in July, but the growth in consumer prices was still nearly triple the historical average. Inflation plays a major role in retirement planning, and we're not out of the woods quite yet. Luckily, an informed approach can calm some investors' fears and provide a roadmap for navigating a challenging economic environment.

The current state of inflation

Wall Street cheered news that July's Consumer Price Index report indicated that inflation was lower than expected and slowing down. That's obviously good news for many consumers -- especially retirees on fixed budgets -- but it's just as important for investors. There's hope that the economy is normalizing, which means that the Fed's aggressive rate hikes are working. Importantly, it means that the Fed might not have to continue extreme monetary tightening, which reduces the likelihood of a recession.

Before we all take a victory lap, it's important to recognize that July's inflation figure was still 8.5%, with food costs up nearly 11%. Even if there's progress and a light at the end of the tunnel, this issue isn't going away overnight. Now's not the time to drop the ball in retirement planning.

Shopper in store with full bag of groceries, reading receipt with an alarmed look.

Image source: Getty Images.

Inflation and retirement

Inflation has always been an important risk to manage in retirement planning. Most people experience rising wages that partially offset the effect of inflation, but you only gain that built-in defense if you're still working. Retirees live on a fixed income, while prices keep moving upward. Over the course of 30 years, the buying power of a dollar gets cut roughly in half, even at historically normal inflation levels.

Retirement planning is all about ensuring that a household has enough cash flow to meet its financial needs and lifestyle goals. We can't really hope to stop inflation -- that's not something that any individual can control. Instead, it's important to acknowledge the effects of inflation and take the necessary steps to manage them.

If you're young, don't panic

Anyone under 45 years old probably shouldn't worry about this current surge of inflation as it pertains to retirement planning. The cost of living almost certainly took a permanent step higher, but there are plenty of factors working in your favor. Rising wages are an important contributor to inflation, and they were up 6.7% last month. Obviously, this doesn't support everyone equally, but most people in the labor force will now earn more dollars through the end of their working lives. That will also increase contributions to Social Security, which should result in higher payouts down the road.

It's also important to understand that the value of many assets is being pushed upward with inflation as well. The price of homes and stocks tend to rise with inflation over the long term. Eventually, you should be able to sell your house for more than you would have otherwise. Similarly, rising prices translate to higher corporate sales and profits, and stock prices should reflect that. Obviously, market conditions play a major role in asset values, but the overall long-term effects are helpful.

That's a major reason why it's important to maintain a fairly aggressive allocation with exposure to equities during the early years of your 401(k) or IRA. Growth is a proven and effective way to mitigate inflation risk.

The playbook for retirees

Things are a bit more complicated for people in or approaching retirement. As you get closer to leaving the workforce, there are fewer dollars to be made and fewer years left for assets to grow. Luckily, there are some built-in safeguards to protect retirees, and there are some important strategies that can help as well.

Some inflation protections are provided to you. Social Security checks are adjusted for cost-of-living increases every year, so retirees' monthly checks are set to rise substantially in 2023. Some people who have defined benefit pension plans also enjoy regular or ad hoc cost-of-living adjustments (COLAs) to their income. If you happen to get pension benefits, the COLA policy is an important, often overlooked part of your retirement plan. Medicare enrollees who don't pay premiums also benefit, because the rising costs of hospital care are borne by taxpayers.

That still doesn't address all of the challenges. Most people above age 50 have significant bond exposure in their retirement accounts, and high inflation can really erode the value of bonds. That's why it's important to keep some stocks in your 401(k) or IRA, even after you've stopped working. You'll still benefit from growth, and the inflation hedge can be a life saver. If you're worried about market risk, consider dividend stocks that produce income, regardless of the market moving up or down.

Retirees can also lean on instruments like Treasure Inflation-Protected Securities (TIPS). These are Treasury bonds that rise in value, based on inflation. They generally bear lower interest rates than other bonds, but they are a great tool for minimizing inflation risk and volatility at the same time. There are a number of reputable exchange-traded funds (ETFs) that hold these securities, so you don't even have to worry about managing that investment.