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  • Writer's pictureKyle Rolek, Retirement Planning Specialist

How Will Inflation Impact Your Retirement?

Updated: Sep 5, 2023

What is Inflation?

Inflation causes prices to increase over time.

A gallon of gas cost an average of $0.36 in 1970. Today, the national average is $3.56.

The image below shows the average annual inflation rate organized by decade.

From 1913 to 2018, inflation has averaged about 3.1% per year. This means that to maintain the standard of living $60,000 gets you this year, you'd have to spend about $61,800 next year.

Inflation is usually not noticeable over a year or two (except during bouts of particularly high inflation like in 2022 and 2023), but the compounding effect adds up to make a real impact over time.

There's also quite a bit of variability between decades.

During periods like the 1970s, inflation AVERAGED over 7% per year! That means someone living on $50,000 per year at the start of the decade would have needed a little over $100,000 per year by the end of the decade to maintain the same standard of living.

Said another way, expenses would have needed to double over a 10 year period just to maintain the same standard of living during the 70s.

With the rate our government is printing money and expanding our national debt, inflation is a real risk that needs to be considered to protect your long-term retirement security.

Why Does Inflation Matter?

Inflation matters because it can be a real threat to your long-term financial security during retirement.

During your working years, salaries often get a "cost of living increase" to help offset the effects of inflation.

In retirement, pensions (for those who have pensions) very rarely provide cost of living increases.

Social Security does provide a cost of living increase (discussed more later), but you can't depend on Social Security Cost of Living Adjustments to fully offset the impact of inflation on your expenses.

Retirement may be the first time you'll feel the full force of inflation.

Healthcare Cost Inflation vs. Average Inflation

We saw above that inflation has averaged about 3.1% from 1913 - 2018.

However, these figures above are based on the "Consumer Price Index" (CPI), which tracks prices paid for a basket of goods and services for urban consumers as a whole.

There's one specific category of expenses that has more importance for retirees than it does for consumers as a whole: healthcare.

Unfortunately for retirees, healthcare is inflating at a rate that far exceeds the average of all goods and services as reported through the CPI.

As shown in the graph below, medical costs have increased by almost 3x the rate of the CPI as a whole between 1985 and 2015.

As a result, the larger the portion of your household expenses that go to healthcare costs, the higher the rate of inflation you may actually experience in retirement.

How Will Inflation Impact Expenses In Retirement?

Inflation is likely to significantly increase expenses over time.

The table below shows how a hypothetical retiree's expenses are projected to change throughout their retirement at age 65 until age 85 as a result of inflation.

The inflation rate is assumed to be 3.5% in the example below (it's higher than historical long-term inflation to account for healthcare costs inflating at a higher rate).

In the first year of retirement at age 65, their expenses are $77,600.

In the 5th year of retirement at age 70, it's protected expenses will be about $92,100 per year. Retirement got about $15,000 per year more expensive in only 5 short years.

In the 10th year of retirement at age 75, it's protected expenses will be about $109,400 per year. Retirement got about $32,000 per year more expensive in only 10 years.

In the 20th year of retirement at age 85, it's protected expenses will be about $154,400 per year. Expenses doubled over 20 years as a result of inflation!

And in the very possible event that they live beyond age 85, potentially far beyond 85, expenses may continue increasing from there as a result of inflation...

Won't they spend less on certain activities as they get older? Probably.

However, on average people are leading healthier lives and staying active longer during retirement today than in years' past.

Banking on expenses decreasing later on in retirement because at some point you'll want to do nothing might not end up working out how you expect.

Realistically, activities and the resulting expenses will likely decrease at some point, but that point may be a lot later than you expect.

This is good news in many ways. But it also makes planning for inflation very important if you intend to maintain your standard of living during retirement.

Will Social Security Protect You From Inflation?

Don't bet on it.

Social Security does have an annual Cost of Living Adjustment (COLA) based on a broad measure of the Consumer Price Index which attempts to measure overall inflation experienced by consumers.

The size of the COLA each year since inception in 1975 is reported in the table below.

Over the last 20 years, it's averaged 2.8%.

Since inception in 1975, it's actually averaged 3.8%.

However, due to funding issues, I would definitely not suggest assuming Social Security benefits get a 3.8% annual cost of living increase each year during your retirement.

To be conservative with your planning, either assume Social Security increases at a lower rate or assume no cost of living increase at all.

What Can You Do To Protect Yourself From Inflation?

Own assets that increase in value over time.

For one, your home may be a good source of inflation protection.

Second, own a healthy amount of high-quality US stock within your retirement accounts and other investment accounts. Own stock for the long-term, don't trade in-and-out based on your short-term predictions of what the market is going to do next.

Stock is the primary vehicle that provides long-term inflation protection (along with real estate including a primary residence).

The S&P stock index has averaged around 10% per year since 1928.

The NASDAQ stock index was averaged around 10% per year since inception in 1972.

Both stock indexes have beaten inflation (3.1% since 1913) by a very wide margin over the long-term.

To benefit from the long-term growth potential and inflation protection that US stock provides while also minimizing the risk of permanent loss of investment:

1 - Establish a well-organized investment plan.

2 - Choose high-quality investments.

When setup correctly, a well-organized retirement investment plan maintains a healthy amount invested in high-quality stock for long-term growth. This help address inflation.

It also keeps an appropriate amount in bank accounts, CDs, and investment grade bond to help protect you from the inevitable short-term stock market fluctuations that will occur during your retirement.

Within a well-organized investment plan specifically designed to fund your expenses during retirement, all components work well together to protect you from inflation and protect your long-term financial security.

Want To Discuss This Individually?

1 - For clients: Call or email me any time as always.

2 - For non-clients: Complete the form on the website to request a retirement planning consultation:

This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures

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Article Disclosures


Informational Purposes

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.


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