Inflation sometimes seems like one of those afflictions of an era long since passed into the
history books. While it’s true that double-digit inflation has been absent for the last 30 years or
more, you may remember the high inflation years of the 1970s. In 2021, the Consumer Price
Index (CPI) rose by 6.8%, the highest point since 1982.
Will the levels of U.S. public debt and loose monetary policy revive the inflation rates of the 70’s
and early 80’s? No one really knows. However one thing is certain—even low inflation rates
over an extended period of time can impact your finances in retirement.
A simple example will illustrate.
An income of $50,000 today at an inflation rate of 3% would have a purchasing power of just
over $32,000 in year 15—a 35% erosion. Said differently, to maintain the desired lifestyle that a
$50,000 income would provide requires $77,900 of income after 15 years of 3% inflation.
Here’s something else to consider. Retirees may feel the impact of inflation even more than
most. Why might this be the case?
Healthcare. Retirees may be subject to a higher rate of inflation than “the headline” Consumer
Price Index because retirees may expect to spend more on health costs than most Americans.
Healthcare inflation has been nearly double that of the CPI in recent years.
Social Security. The CPI is the most frequently used statistic for measuring inflation. It is
technically the “Consumer Price Index for All Urban Consumers” (CPI-U). But the Social
Security Administration bases its cost of living adjustments on the “Consumer Price Index for
Urban Wage Earners and Clerical Workers” (CPI-W). The CPI-W gives less weighting to
housing and medical care, which are categories that seniors typically spend more on. This
means that the social security cost of living increase may not be keeping up with the actual cost
of living increases that many seniors face.
Investment Allocation. Many retirees’ investment portfolios tend to have more weighting in
conservative investments such as bonds, cash, and other fixed income. In the current time of
very low interest rates, yields on these fixed income investments may not be enough to keep up
with inflation.
Inflation is a thief; it steals the purchasing power of your retirement savings. But, as with
your other possessions, there are strategies that may help you from being “robbed” of your
purchasing power. Discuss with your financial advisor to see if your retirement plan and
investment strategy is positioned to help you guard against the impact of inflation.
