The Impact of Inflation on Your Retirement

When designing your retirement plan and investment portfolio, it is important to invest with the impact of inflation in mind. The author describes the impact it can have on your plans and your lifestyle.

Keeping Inflation in Mind

When designing your retirement plan and investment portfolio, it is important to invest with the impact of inflation in mind. Inflation decreases your purchasing power over time and erodes investment returns. To maintain your standard of living over a retirement that could last 30 years or more you must combat this erosive effect.

Inflation in the Past

The average rate of inflation for the last 30 years was 3.2%. A $25,000 annual pension income in 1983 would only have the purchasing power of $9,898 in 2013. This results in a loss of over 60% of the original purchasing power.

The Story About the Price of Gasoline

For many people, the price of a gallon of gasoline is a go-to reference for the rising expenses caused by inflation. It typically starts with the words “in my day” or “I remember when,” often in a bragging tone indicating that their generation knew how to keep prices low. But they tend to forget that in their day, they probably thought the price of gasoline was way too high as well. Inflation isn’t an issue limited to the new generation.

In 1984, the average price of a gallon of gasoline was $1.27. A gallon of milk was $1.94, a loaf of bread was $.71, and a postage stamp was $.20. Today, the average prices of these items are around $3.20, $3.73, $1.40, and $.49, respectively. As you can see, if your income stayed the same as it was in 1984, you’d have a big problem just paying for basic necessities in 2014.

The Slow Boil

Inflation is like the slow boil of the crab pot. The heat inches up degree by degree while the crab doesn’t recognize its impending doom. With inflation, the sale on flank steaks you wait for every month to put your “famous” marinade on now only goes on sale every few months, and the sale price doesn’t drop as low as it used to. Discounts on your favorite snack cakes now only apply if you buy three boxes. The can of mini ravioli with mini meatballs that used to be a dollar is now a buck eight cents. It’s a slow boil, but the end result is undeniable.

Inflation Looking Forward

If you retired in 2010 needing $50,000 per year to cover expenses, you would need $75,000 in 2024 and over $100,000 in 2035 just to maintain the same purchasing power, assuming a 3% inflation rate over the entire period. The inevitable budget cutbacks start with discretionary items that you don’t miss a whole lot, then spread until essential purchases start putting a lump in your throat as well. There comes a point when you are worried about paying next month’s bills. 

The Little Things to Deal with Inflation

When faced with the rising prices on your weekly shopping, make purchase substitutions and be open to more creative food purchases. Instead of sirloin, buy cheaper cuts of meat to make flavorful stews and stir fry with lots of vegetables. It will add to your wallet and your health at the same time.

Being extra conscious of wasted spending means turning of the lights off when you leave the room, being content with a few less premium channels, making a delicious home-cooked meal instead of buying a mediocre meal at a restaurant, and consolidating your errands into a single weekly trip.

Dealing with the Inevitable

It is inevitable that most prices will rise over time. Fortunately for those who are still working, wages typically rise as well. But in retirement, other than your government pension and Social Security, your retirement savings do not come with cost of living adjustments.

If you are relying heavily on your investment portfolio and personal savings to carry you through retirement, only a comprehensive financial plan that addresses the impact of inflation will get you where you need to be. Speak with a federal benefits specialist to see if your retirement stands up to the effects of inflation.

John Stohlman has been serving clients in the DC metro area since 1983. He is a frequent keynote speaker throughout the DC area and co-author of Navigating Your Federal Retirement Benefits. For more information visit