• Kyle Rolek, Retirement Planning Specialist

How Will Inflation Impact Your Retirement?

Updated: Feb 4

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 $2.16.

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. It's not that noticeable over a year or two, 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 $100,000 per year by the end of the decade to maintain the same standard of living.

Inflation has been lower recently at only 1.8% per year from 2010 to 2018. But that could change in the future with the rate our government is currently printing money and expanding our national debt.

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. We also saw inflation has been lower recently.

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 will likely make your expenses go up over time.

The table below shows how a hypothetical retiree's expenses are projected to change throughout retirement as a result of inflation.

The first column shows the year. This person wants to retire in 2021.

The second column shows their projected annual expenses during retirement. Their expenses are expected to be about $60,000 per year initially.

The third column shows how much their annual expenses increased over time compared to the first year of retirement.

The top of the table shows the assumptions used.

$50,000 of the expenses are for items other than healthcare such as food, utilities, property taxes, car expenses, travel, entertainment, and other items. It's assumed that these expenses increase by 3% per year during retirement on average.

$10,000 of their expenses are for healthcare costs, which is a fair average for a retired couple who are both medicare eligible, although costs will vary depending on factors such as income and use of services. Healthcare expenses are assumed to increase by 6% per year during retirement.

With $50,000 of non-healthcare expenses inflating at 3% and $10,000 of healthcare expenses inflating at 6%, the blended-average inflation rate is initially assumed to be 3.5% per year.

$60,000 is their projected total annual expenses in 2021.

In 2031, it's protected expenses will be about $84,600 per year. Retirement got about $24,600 per year more expensive in only 10 years.

In 2041, it's projected expenses will be about $119,400 per year. Retirement got almost $60,000 per year more expensive in 20 years.

And expenses continue to increase from there...

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

However, I'll tell you from first-hand experience that I regularly see clients today in there 80s living very active lives. 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 "later on" in retirement 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 for some time.

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

In 2021, Social Security benefits will increase by 1.3%.

Over the last 10 years, the Social Security Cost of Living Adjustment has averaged 1.7%.

Over the last 20 years, it's averaged 2.0%.

Since inception in 1975, it's actually averaged 3.6%. However, I would definitely not suggest assuming Social Security benefits get a 3.6% annual cost of living increase each year during your retirement. This average is skewed higher by some very high COLAs in the 70s and early 80s.

To be conservative with your planning, either assume Social Security increases at the current rate (1.3% in 2021) 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.

Cash currently pays next to nothing. It's very likely to lose value to inflation each year. However, cash does have an important role in the overall retirement plan: to provide liquidity and stability. It's important to keep cash for those purposes.

Investment grade bonds also currently pay very little. At current rates, these assets will be fortunate to keep pace with inflation. However, investment grade bonds do have an important role within the overall retirement plan: protection from short-term stock market fluctuations. Investment grade bonds can be useful to fund income distributions in times when stock markets are down so that stock doesn't need to be sold at bad times.

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. In the large majority of cases, this means having some cash, some investment-grade bond, and a healthy amount of high-quality stock.

2 - Choose high-quality investments. This generally includes stock of large, financially stable US companies and also investment-grade bonds. The specific percentage to allocate to each depends on your unique cash flow needs and personal preferences.

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 retains some cash and bond to help protect you from the inevitable short-term stock market fluctuations that will occur during your retirement.

Within a well-organized plan, stock, bond, and cash all work together to protect your long-term financial security.

Want a 1-on-1 retirement planning session? Fill out the form on our website, call us at 267-427-5667, or email

Social Security Cost of Living Adjustment data:

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