Born to a Jewish family in Red Bank, New Jersey, Schafer began her career as an actress on Broadway before moving to Los Angeles in 1941 to work in films. She played several supporting roles during the 1940s (such as a "Mrs. Howell"-like wife of a German officer in the 1942 film Reunion in France) and 1950s, and also appeared most notably in The Snake Pit (1948) and Anastasia (1956) while returning to New York City to live and work between film roles.

Schafer appeared on Broadway in seventeen plays between 1928 and 1959, almost always playing supporting roles. Almost all of her Broadway appearances were in short-run plays with the exceptions of Lady in the Dark (1941-42), The Doughgirls (1942-44), and Romanoff and Juliet (1957-58). She also appeared in stock and regional productions of plays.

Schafer was married to oft-married actor Louis Calhern from 1934 to 1942, but they had no children.

Schafer was legendarily discreet about her age, never even telling Calhern, even when he quizzed her on his deathbed. 1912 was generally given as her birth year for many years, which few believed, yet her actual year of birth (which was not discerned until after her death) of 1900, shocked even her intimate friends.

Schafer is best known for the television series Gilligan's Island from 1964 until 1967, playing the role of millionaire's wife "Lovey Howell", and she reprised her role in the made-for-TV Gilligan's Island movies that were made after the show's demise. Originally written as a humorousless grande dame, Schafer worked with the writers to create a dizzy character not unlike the scatterbrain roles played in 1930s films by Mary Boland and Billie Burke.

She continued acting until her late 80s and was a guest star on many TV series. Her most notable film appearance in later life was in The Day of the Locust (1975).

In real life, she was far removed from the dizzy "Lovey Howell" she had played. Her astute investments, particularly in real estate, made her a multimillionaire.

Differing sources state that most of this fortune was bequeathed to either her Gilligan's Island co-star, Dawn Wells, or to care of her dogs. Miss Wells has never admitted to receiving anything from Ms. Schafer's estate.

Natalie Schafer died of cancer at home in Los Angeles, California at the age of 90.