I'm sure none of us has spent time with our grandparents without hearing statements like "I remember when the movies only cost a quarter," and "A thousand dollars sure doesn't buy what it used to."

After a few college economics courses, I simply chalked it up to stuff that grandparents say. Obviously, they just didn't understand the forces of inflation compounded over 40 years.

What a smart aleck
But after a recent trip to the grocery store, I caught myself sounding like my grandparents. "Four dollars for milk?" I lamented to my wife. "I remember when a gallon of milk cost $2! And that was just a few years ago."

Without getting into a complex macroeconomic analysis of why milk prices have doubled in eight years (thanks, ethanol), my trip to the grocery store was a valuable reminder of inflation's destructive power.

I don't even want to think about what a gallon of milk will cost when I retire. But I'm still going to want it on my cereal, so it's best to develop a plan now that will let me enjoy my Apple Jacks when I'm 70.

Affording $12 milk in 2040
According to The Economist, the average world inflation rate has risen to 5.5%. The U.S. is enjoying 3.9% inflation. In emerging markets like China and India, prices have risen 8% to 10% -- and those are the official statistics.

Try outpacing those rates with Treasury bills. At present, you'd actually be losing purchasing power by investing in most Treasuries.

When it comes to battling inflation, our only good defense is a good offense. That means keeping an appropriate allocation of your portfolio in equities, even well into retirement.

For example, the Vanguard Target Retirement Income Fund (VTINX) allocates a full 30% of its assets in equities using these funds:


% of Fund Assets

Top Holdings

Vanguard Total Stock Market


ConocoPhillips (NYSE:COP), AT&T (NYSE:T), Johnson & Johnson

Vanguard European Stock Index


GlaxoSmithKline (NYSE:GSK), HSBC, Vodafone (NYSE:VOD)

Vanguard Pacific Stock Index


Toyota, Sony (NYSE:SNE), BHP Billiton

Vanguard Emerging Markets


Vale (NYSE:RIO), Sasol (NYSE:SSL), America Movil

Sources: Vanguard and Yahoo! Finance.

Note that this Vanguard fund is designed for investors currently in retirement. The further you are from your ideal retirement age, the greater the percentage of your portfolio that should be invested in equities.

Bring inflation to its knees
See, prices will continue to rise for the rest of our lives. Equities give us the best chance to not only keep up with inflation, but even stay ahead of it, in order to increase our purchasing power down the road.

If you're not sure how to begin saving your retirement from inflation, our Motley Fool Rule Your Retirement service can help. In the most recent issue, for example, advisor Robert Brokamp discussed ways you can use different asset classes to improve your returns while reducing overall risk. This way, you'll not only battle inflation, but also sleep a bit easier at night.

To learn more about this strategy and countless other retirement tips, consider a free 30-day trial of Rule Your Retirement. You can take advantage of our offer by clicking here. There is no obligation to subscribe.

This article was originally published on June 26, 2008. It has been updated.

Todd Wenning knows you gotta dip, you gotta doodle, you gotta eat Grandma's strudel. 'Cause she stayed up all night to make it from scratch. He doesn't own shares of any company mentioned. Sasol is a Motley Fool Global Gains pick. Sasol, GlaxoSmithKline, and Johnson & Johnson are Income Investor recommendations. The Fool's disclosure policy gives respect to the Grandma.