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One factor many future retirees overlook when calculating their retirement income is inflation. In simplest terms, inflation means that the price of everything increases over time, including housing, groceries, gas, insurance and more. Over time, these small increases start to eat away into your planned retirement income and how much it can purchase in “today’s money.” You may think you have plenty of retirement savings, but if prices continue to inch upwards, your purchasing power decreases over time.
To many soon-to-be retirees, inflation planning is a “taboo” subject, lest they have to consider possibly outliving their retirement savings. This year, it’s something that no one can afford to ignore, with prices increasing faster than they have in three decades. People in retirement or approaching retirement should take extra care to protect their savings.
As you can see in the chart below, prices over the past 20 years. Have continued to increase – while the purchasing power of a dollar has continued to decline.
Inflation and Retirement Planning
When inflation increases, do does the need for more retirement income. Wage increases can help you keep pace with inflation when you are employed. However, during retirement, those “cost of living” increases stop and more income is needed to support the same level of lifestyle and spending.
Take a look at how your retirement income will be affected by inflation in the next 20 years. If you anticipate requiring $50,000/year income to support your lifestyle now, you would need almost $64,000 just 10 years later to meet those same needs, and $79,000 at 20 years. The 20-year average inflation rate is 2.32%. One dollar today will, generally, be worth 64 cents in 20 years.
How Inflation is Measured
The chart above is based on the Consumer Price Index for all Urban Consumers (CPI-U), which is widely used to measure the average prices of goods and services purchased by consumers.
When Inflation Increases, So Does the Need for More Retirement Income
When you’re working, wage increases can help you keep pace with inflation. When you’re in retirement, those increases stop and additional income is needed to support your lifestyle. Despite a recent 5.9% cost of living adjustment to Social Security benefits, many retirees are still being hit hard by price increases. It’s difficult to outpace escalating costs with conventional retirement benefits.
Your Retirement Income Needs Will Change Over the Course of 20 Years
If you have determined that you will need $50,000 a year at the beginning of retirement to cover your needs, you will need almost $64,000 a year just 10 years later to meet those same needs. And after 20 years, you will then need almost $79,000 a year. The 20 year inflation rate is 2.32%. One dollar today may be worth only 64 cents in 20 years.
Start Protecting Your Future Retirement Income NOW
Delay Social Security Benefits:
I know I’m not the first to say this, but maximize your future social security benefits by waiting as long as possible – ideally, until age 70 – to draw benefits. Your monthly payments will be higher and augmented by annual cost of living percentage adjustment once you do start receiving checks.
Watch Your Spending Before and During Retirement

Be vigilant about how much you are spending and combine that oversight with both an aggressive savings plan and paying down debt, while also avoiding borrowing money.

Understand Future Medical Expenses
Most future retirees don’t fully understand the impact medical spending can have on their annual income. After years of minimal doctor visits and hospital stays, many are astounded at their average annual spending on medical care as they age, despite Medicare and supplemental plans. I advise future retirees currently in employer-sponsored plans to contribute to health savings account, which can be rolled over year to year and accumulate for future needs. Both contributions and withdrawals are tax-free if used towards approved treatments/items.
Consider Long-Term Care
Long-term care insurance can cover care in an assisted living facility or in-home care. While I don’t advise that you invest all your money in this product, it is smart to invest a portion.
Diversify Your Retirement Savings
Put away as much as possible in a combination of 401(k), I.R.A.s and H.S.A.s, ensuring that your retirement portfolio is diversified and protected with Treasure Inflation-Protected Securities (or TIPS), short-term bonds, and stocks.
Incorporate Insurance Into a Holistic Financial Plan
Consider adding in annuities, which can allow you to turn a lump sum of money into a steady income stream for a set number of years, or even the rest of your life. Annuities can help reduce the risk — and the fear — of outliving your savings. If you’re preparing for or living in retirement, low-cost, no-load insurance may give you a solution for more tax-deferred savings and allow you to participate in the market while protecting against downturns and provide a steady stream of guaranteed income to protect against longevity risk.
Even without the effects of a banner year for inflation, it’s vital that you plan for increased cost of living, as well as unforeseen “financial shocks”, such as health emergencies, job loss, and even divorce.
Talk to Jeff Sachs today to see what steps he can take to protect your retirement income from inflation!