Be sure to accurately factor inflation when retirement planning

Posted By on July 28, 2014

I regularly eyeball the government’s reported CPI inflation data (although question the applicability for real living in America?), and am concerned for those planning or already retired living on their cpiinflationcalculator“conservatively” invested savings. Many that I’ve talked with moved to cash positions after the 2008 recession or moved to much more conservative investments. Others hold a good chunk of their personal IRAs and 401K savings in low paying CD, bonds or even lower with money market savings. They do it thinking that they are protecting their capital … but fail to look at what the dollar is worth in buying power. A quick look (above) at what inflation can do to $50,000 sitting in cash over ten years should be a wake-up call when it comes to trying to live off ones saving for 20 or 30 years.

Inflation of goods and services averages about 3.2% a year.* Right now, we are in a period of very low inflation. But over time, inflation will return, maybe at the high rates we experienced in the early ’80s or maybe at lower rates. The smart bet is to plan on about 3% a year. While that doesn’t sound like much, here’s what it means: If you need $50,000 to live per year in retirement today, in 25 years you’ll need $100,000 per year to maintain the same standard of living. That’s because at 3% a year, the value of your money will fall by 50% over 25 years. Social Security is adjusted for inflation, giving you some protection, but your specific inflation rate might be different from the general inflation rate as a result of rapidly rising healthcare and long-term care costs.

You have to keep growing your investments throughout retirement or you could find your standard of living dropping each year. Another way to say it is that investments like CDs, bank accounts and certain bonds that protect 100% of your principal will give you the illusion of safety while slowly guaranteeing a reduction in your buying power over time. A smart financial plan accounts for inflation and can help in the pursuit of a lasting retirement income.


Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.