Inflation Erodes Retirement Savings

Inflation does not literally reduce the number of dollars you possess, but it does reduce your purchasing power.
Inflation Erodes Your Savings


Inflation is defined as an increase in the overall cost of goods. Please note that inflation does not apply to the price level of just one good, but rather to how prices are doing overall. A consumer facing inflation that occurs at the rate of 10% per year will be able to buy 10% less goods at the end of the year if his or her income stays the same. Inflation can also be defined as a decline in the real purchasing power of the applicable currency.1

For example, if an item costs $1 today, after one year of 5% inflation it would cost $1.05. However, after ten years of 5% inflation that $1 item would cost nearly $1.63. The impact of inflation is often referred to as a decline in purchasing power, as one dollar does not buy as much in ten years as it does today.

Consumer Price Index (CPI)

The CPI represents prices paid by consumers (or households). Prices for a basket of goods are compiled for a certain base period. Price data for the same basket of goods is then collected on a monthly basis. This data is used to compare the prices for a particular month with the prices from a different time period.1

$50,000 per year in 2026 is expected to buy fewer goods and services than it did in 2021. And in 2029, $50,000 will probably buy even fewer goods and services than it did in 2024. You get the picture. You can’t plan to spend the exact same amount of money year after year and continue to meet your needs in exactly the same way.

Medical costs are currently rising faster than the U.S. inflation rate. By 2020, Medicare and Medicaid costs will rise to 24 percent of the national budget as baby boomers retire. Health care costs that increase faster than the inflation rate will translate into less coverage by Medicare taxes and the Trust Fund. By 2030, the Trust Fund will likely be bankrupt and by this time, taxes will only be able to pay for 48 percent of healthcare costs. In retirement, you’re likely to need more medical care than you do at a younger age, so it’s important to consider medical inflation as you plan for retirement because these costs can be significant with the onset of age-related illnesses.1,4

Food costs can be volatile. For example, dairy, beef and grains have seen pricing spikes in recent years due to factors such as drought, livestock illnesses and changing farming practices. Expect more of the same in the future.

Fuel costs, like the price of gas, tend to affect most goods since shipping prices increase with fuel prices. As shipping costs rise, so do costs for goods that are shipped. And if you plan to travel in retirement, you’ll also feel the impact of fuel inflation on how much it will cost you to fly or drive. 1

And finally, the housing market can have an important impact on the overall economy and CPI, but in the early part of 2019, there has been a growing disconnect between them. Many analysts believe that the housing market turnover has reached its peak and that while there is still expected to be house pricing growth, the rate of growth will likely be at a much lower rate than it has been. 5

The Federal Reserve Bank of St. Louis tracks economic data such as CPI.

The Research Division of the Federal Reserve Bank of St. Louis monitors the economic and financial literature and produces research in the areas of money and banking, macroeconomics, and international and regional economics, including the FRED tools available on this page.

As you consider your retirement needs, incorporate inflation into your planning.

Use the Impact Of Inflation calculator on this page to understand the impact of inflation on your retirement income needs.

Be aware of how inflation rates can vary: After World War II, the average inflation has been 3.9% through 2013. Inflation for 20-year periods ending between the years 1981 and 1994 exceeded 6%. 2

The period from 1965 through 1985 began with Presidents Kennedy and Johnson spending more on the Vietnam War and on Great Society social programs here at home. The Federal Reserve accommodated fiscal policy by increasing the money supply rapidly. Then the Fed tightened sharply in 1970, triggering a recession. To get out of that recession, they pushed the money supply up sharply. As inflation rose, the Fed tightened again, causing the 1973-75 recession. Then more easing and another round of tightening that sent the economy into the very severe double-dip recession of 1980-82.6

Over 30-year periods 3.9% inflation brings the purchasing power of $100 to $32, and according to IRS Publication 590 there is a 50% chance of you or your spouse at age 65 living past age 97, which is a 32 year retirement span. This is truly bad news for the elderly who may be facing high medical costs or the burden of long-term-care. In 2019, the pace of healthcare inflation at 4.6% outpaced economy-side inflation for the first time since 2010. 2,4,7

Even when inflation is low, retirees will be hit harder than others because the costs that affect them most tend to continue to rise.

Retirement is a period in which some consumer spending categories decrease, but you will always have exposure to energy costs, and your consumption of health care will increase. According to the Centers for Medicare and Medicaid Services, per capita health spending for elderly Americans was three times that of a working adult and five times that of children in 2010, averaging $18,424 annually. Further, analysts believe that 2019 could mark the beginning of another period of higher medical inflation which would disproportionately impact retired citizens. 4

In 2014, the CMS estimated that healthcare expenditures increased by 5.4% overall. Over that same period, inflation averaged just 1.6%. 3

Make Sure You Adequately Estimate Your After-Inflation Retirement Savings.

Inflation affects your everyday life now, it will make your first days of income independence difficult, and it will make your 25th year of retirement incredibly difficult. As you estimate the amount of money you will have set aside for retirement, make sure to include the following steps:
• Decide the age at which you want to retire.
• Decide the annual income you will need for your retirement years. It may be wise to estimate on the high end for this number. Generally speaking, it is reasonable to assume you will need about 80% of your current annual salary in order to maintain your standard of living.
• Add the current market value of all your savings and investments.
• Determine a realistic annualized real rate of return (net of inflation) on your investments.
• Conservatively assume inflation will be 4% annually. A realistic rate of return would be 6% to 10%. Again, estimate on the low end to be on the safe side.
• If you have a company pension plan, obtain an estimate of its value from your plan provider.
• Estimate the value of your Social Security benefits using the Social Security Benefits calculator on this page.


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