How to Build a Portfolio That Keeps Up With Inflation

If you’ve been paying attention to prices over the past few years, you’ve likely felt it firsthand: your dollars don’t go as far as they used to. Food, transportation, healthcare, housing, almost everything has become more expensive.

That naturally leads to a bigger question: 

Is your portfolio actually keeping up with inflation?

At SGL Financial, our Chicagoland financial professionals have had more conversations around this topic than almost any other over the past few years. Many people assume their portfolio is “doing fine” because it’s growing on paper. 

But growth alone doesn’t tell the full story.

What matters is what that growth looks like after you deduct the impact of inflation (your real rate of return). We often frame this differently: It’s not just about returns; it’s about real returns. This does not include deductions for other forms of erosion that may include: Distributions, taxes, expenses, and other deductions that produce your net return.

What Does It Mean to Keep Up With Inflation?

Inflation quietly erodes purchasing power over time, often more than most people realize.

In our work with investors across the Chicago metro area, we’ve noticed that many portfolios are built around nominal return targets that don’t fully account for inflation. Over decades, this can create shortfalls in retirement income, especially for those planning a 30-year retirement.

For example, imagine retiring with a $1,000,000 portfolio and planning to withdraw $50,000 per year to support your lifestyle. If your portfolio grows at an average of 6% annually, but inflation runs at 4%, your real return—after accounting for annual withdrawals and inflation—is roughly −3%. Taxes would reduce this further.

Here’s how that plays out over time:

• Year 1: $50,000 covers your expenses.
• Year 10: The same lifestyle costs about $74,000.
• Year 20: It costs nearly $110,000.

Even as your portfolio grows nominally, your withdrawals must increase just to maintain the same standard of living. Over time, the gap between what your portfolio earns and what your lifestyle requires compounds.

We’ve seen this with investors whose portfolios looked strong on paper, only to gradually fall short of supporting their desired lifestyle in later retirement years.

Is Your Portfolio Built Around Real Returns or Just Market Benchmarks?

Most portfolios are still built with one reference point in mind: market benchmarks. The S&P 500, a 60/40 index mix, or some variation of historical averages, often becomes the measuring stick for success. But here’s the problem: benchmarks don’t account for your real life.

They don’t reflect inflation, distributions, taxes, or the actual income you’ll need years from now. For example, a spouse needs assisted living, skilled nursing, or memory care late in life.

A portfolio that tracks a benchmark might look promising, but if it’s not keeping up with rising costs or supporting your future spending needs, it’s missing the mark. That’s where the concept of real returns comes in: what your money is actually worth after inflation, and how it translates into your effective purchasing power over time.

Shifting the focus from “How did I perform versus the market?” to “Am I maintaining and growing my real wealth?” can change how a portfolio is structured. It often leads to more thoughtful decisions around diversification, income planning, and long-term risk exposure, especially for those approaching or already in retirement.

How Do You Balance Growth and Income in a Portfolio When Inflation Is Rising?

One of the most common mistakes we see is leaning too heavily in one direction, either overly conservative or overly aggressive. You are ideally somewhere in between.

Not Our Parents Problem

Rates of return, risk exposure, and inflation were not big problems for our parents when life spans were shorter. It is a problem for us due to rising longevity, medical science, and healthier lifestyles.

The “Too Conservative” Problem

Holding large amounts of cash or short-duration bonds may feel safer, but over longer periods, inflation will steadily erode their purchasing power. What feels safe today may create significant pressure later in life.

The “Too Aggressive” Problem

On the other hand, chasing high returns through increased equity exposure can introduce volatility that’s difficult to manage, especially if you’re approaching or in retirement. A more balanced portfolio should focus on: 

• Growth assets to outpace inflation over time
  
• Income-producing investments to support income requirements
  
• A balanced investment strategy to help manage market volatility
  

This isn’t about finding a perfect mix; it’s about creating a flexible structure that works in rising and falling markets.

Which Assets Help Protect Your Portfolio From Inflation?

When inflation becomes a concern, it’s fairly common to look for a single “inflation hedge.” That’s where a strategy can get off track.

There’s no single asset class that consistently solves inflation across market environments. Instead, we think about how different types of investments respond under a variety of market conditions. 

Some areas that are often part of the conversation include:

• Equities (Stocks): Companies with pricing power may be able to pass rising costs to consumers. Over longer periods, equities have historically outpaced inflation and the bond market, although not without volatility.
  
• Real Assets: Real estate and infrastructure-related investments are often discussed in inflationary environments because their underlying value is tied to physical assets, and income streams are indexed to inflation.
• Commodities: Energy, precious metals, and agricultural products can respond directly to inflation pressures, but they can also be unpredictable and cyclical.
• Inflation-Linked Bonds: Treasury Inflation-Protected Securities (TIPS) are designed to provide income with inflation adjustments.

• Alternative Investments: In some cases, strategies that behave differently from traditional stocks and bonds may be considered part of a broader diversification strategy.

In our experience, the key is not selecting one of these strategies; it’s understanding how they work together and which asset allocation best suits your specific situation.

Listen to our podcast episode, “The Retirement Risk Most People Overlook.”

Why Is Focusing on One Inflation Hedge a Risky Strategy?

One of the biggest pitfalls we see is simple “single-solution thinking.” When inflation becomes a headline issue, investors often feel pressure to make big, reactive moves, like shifting assets into gold, commodities, or a specific sector of the economy (technology, healthcare, energy).

The challenge is that inflation itself isn’t a single, predictable force.

Sometimes it’s driven by supply chain issues. Other times it’s tied to wage growth, energy prices, or monetary policy. Different drivers can lead to very different market outcomes.

That’s why we emphasize a broader approach:

• Avoid concentrating too heavily on one “inflation strategy”
• Maintain flexibility across different market conditions
• Focus on the role each investment plays, not just its label
• Consider inflation, taxes, and distributions when you invest
• Make sure risk exposure matches risk tolerance
  

A portfolio built to respond to multiple scenarios tends to be more durable than one built around a single expectation.

How Should You Diversify Across Asset Classes and Time Horizons?

Diversification is your number one strategy for minimizing risk. It is often discussed but not always implemented correctly.

In an inflationary environment, diversification becomes even more important, not just across asset classes, but across time horizons.

• Short-Term Needs: Assets that support near-term spending should be less sensitive to market volatility.
  
• Intermediate-Term Goals: Investments in this category may balance income needs with moderate growth to offset inflation, distributions, and taxes.
• Long-Term Growth: This portion of the portfolio is typically where inflation-fighting potential is strongest, but it also carries the greatest volatility.

As experienced investment advisors in Chicagoland, we’ve seen that structuring portfolios across time horizons can help to reduce the need to make reactive decisions during periods of higher inflation or market volatility.

Derisky Business: Listen to our podcast episode on steps you can take today to reduce the amount of risk you may be taking with your retirement savings. 

Is Your Portfolio Periodically Rebalanced to Stay Aligned with Inflation Outlooks?

Even a well-structured portfolio won’t stay aligned on its own. Inflation doesn’t just impact purchasing power; it can also shift how different asset classes perform relative to each other.

That’s where rebalancing becomes important.

Over time, certain investments may outperform while others lag. Without adjustments, the portfolio can drift away from its original allocation that balances risk and reward. Rebalancing is less about timing the market and more about:

• Maintaining alignment with long-term objectives
• Managing unintended concentration
• Adjusting to changes in inflation expectations
• Matching risk and reward
  

For example, a period of strong equity performance during inflationary times may actually increase overall risk exposure. Rebalancing ratios (stocks versus bonds) can help bring that back into line. On the flip side, during periods when certain inflation-sensitive assets underperform, rebalancing may involve reassessing future risk exposure rather than reacting to recent events.

The Role of Behavioral Discipline

Inflation doesn’t just affect markets; it also affects your spending behavior. When prices rise, it’s natural to feel pressure to “do something” to offset their impact. 

That might mean chasing recent winners or moving away from economic sectors that feel uncertain. In our experience, those decisions are often too little and too late.

We’ve seen investors:

• Shift heavily into commodities after they’ve already surged
  
• Exit equities during periods of inflation-driven volatility
  
• Overcorrect toward income investments when rising yields are temporary
  

Each of these reactions can disrupt a long-term strategy. That’s why one of the most important elements of building a portfolio that keeps up with inflation isn’t just allocation; it’s discipline during volatile times.

How SGL Financial Can Help

Inflation isn’t a short-term concern; it’s a long-term reality that every portfolio needs to account for. The question isn’t whether inflation will impact your financial life. It is how much.

If you’re currently evaluating your investment strategy, it may be worth stepping back and asking:

• Are my returns keeping up with inflation, or just keeping pace with the markets?
  
• Is my portfolio balanced to reflect both growth and income needs?
  
• Do I have a clear framework for adjusting as conditions change?
  
• What happens if one spouse lives longer than expected or requires specialized healthcare?
  

These are the types of conversations we regularly have with clients as Chicagoland financial advisors. Because at the end of the day, it’s not just about growing your portfolio; it’s about what that portfolio can do for you over longer time periods.

Connect with us to discuss your current portfolio configuration.