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 trip to the grocery store a few months back, 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, 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
Though runaway inflation concerns have recently been tempered a bit in the short term, it's still relatively high and troublesome. Despite the economic slowdown, The Economist still expects 4.5% U.S. inflation for 2008.

Try outpacing those rates with Treasury bills. At present, you'd 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


Verizon (NYSE:VZ), Qualcomm (NASDAQ:QCOM), Medtronic (NYSE:MDT)

Vanguard European Stock Index


Nokia (NYSE:NOK), Unilever (NYSE:UL)

Vanguard Pacific Stock Index


Canon, Honda Motor

Vanguard Emerging Markets Stock Index


Infosys (NASDAQ:INFY), Teva Pharmaceuticals (NASDAQ:TEVA)

Sources: Vanguard.

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 not only to keep up with inflation, but even to stay ahead of it, in order to increase our purchasing power down the road. As the recent market volatility has reminded us, however, having too many stocks in your retirement portfolio can invite dire consequences. It's important to allocate just enough to stocks so you can achieve your inflation-busting goals.

If you're not sure how to begin saving your retirement from inflation, our Motley Fool Rule Your Retirement service can help. In a 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. Todd does not own shares of any company mentioned. Unilever is a Motley Fool Income Investor recommendation. Nokia is an Inside Value selection. The Fool's disclosure policy gives respect to the Grandma.