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What Will It Cost to Live When You Retire? (Inflation is a Killer…)

“Oh, you did a great job mowing my lawn sonny-Jim. Here’s a shiny new quarter…” Has this happened to you? It’s happened to me for sure! Why is it that old people are so freaking cheap?! …It’s not they’re fault actually. It’s all due to inflation and the impact it has on retirement. What once was a large sum of money can now only buy a crummy gum ball…

This post contains affiliate links.

What is Inflation?

Put simply, inflation is a slow price increase on goods and services from year to year. 

Investopedia describes it this way:

“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”

In other words, as time goes on and prices increase, your money will buy less and less.

Think about it. In 1998 the cost of a gallon of gas was $1.12. And what is it today? $3.00? More? All thanks to inflation.

Inflation impact on retirement - worse than you think!But…inflation is actually a good thing…

Many think of inflation as a bad thing, but it really isn’t. Sure, you can’t buy as much 10 years from now with your money today, but that’s actually part of the good thing!

Inflation stimulates the economy because it prompts people to buy more goods today rather than wait weeks, months, or years down the road. And, the more things people are willing to buy, the more businesses thrive, and the more jobs are created!

In summary…you’d better just get used to inflation, because it’s not going anywhere. The Fed likes it, business owners like it, and economists love it. Inflation…it’s probably one of those things that will never die!

How Inflation Will Affect Your Retirement

What impact will inflation have on retirement? Well…this is where things get tricky. Inflation is bad news for retirement, especially if you aren’t a big fan of investing.

I whipped up a fancy matrix to show you the inflation impact on retirement (okay, it’s really not that fancy…but it has a ton of numbers in it, which means it MUST be important! ;)).

Inflation Impact on Retirement – As a Matrix

The matrix below is a little intimidating, so let’s walk through it with an example. 

  • Let’s say you’d be comfortable retiring on $60,000 a year in today’s dollars.
  • But, you’re 35 and not ready to retire yet.
  • You want to retire at age 65, which is 30 years from now.

So, start on the left and find the $60,000 figure. Then, follow the chart to the right until you get to the column, “30” since we want to retire 30 years from now.

The result: $145,600. 

What does this mean?

This means that $60,000 a year today will be equivalent to $145,600, 30 years from now! Yikes!

Inflation impact on retirement

Soooo…Pretty much inflation is ruining your retirement. 

And you know what’s even worse? What if you live to 95 years old?

Your yearly expenses won’t be $145,000 a year anymore. They’ll jump to $353,000 a year! (Now do you understand why that old lady down the street wants to pay you a quarter for everything?? The impact of inflation is INSANE!!)

The impact of inflation on retirement is just astounding. Fortunately, there are ways to account for this invisible force!

How to Account For Inflation in Retirement Planning?

If you like to save money and stash your cash under your mattress, you’re essentially losing 3% of your earning power every year (soooo…not smart). It’s about the worst solution you could have for this inflation problem.

If you simply want to keep up with inflation, then you’ll need to earn roughly 3% on your money. Do this and your dollars will add up linearly, all things considered. This won’t make you wealthy by any means, but at least you won’t be going backwards like the mattress stuffer!

It’s easy to understand if you’re making less than inflation or even the equivalent of the inflation number, but what about if you’re investing and trying to get to that magic retirement number? How can you really figure it out with inflation in the mix? There are just so many moving numbers!

The answer is complex. Fortunately, there are simple tools that can help.

Personal Capital’s Simple Retirement Tool

My affiliate partner, Personal Capital, offers a free tool that does just this – figures out if you’re saving enough for retirement while factoring in inflation.

Just click the link above or the picture below to head to the free tool.

Inflation impact on retirement - free tool with Personal Capital

As you can see, in the Personal Capital tool, I entered very similar numbers to our example above.

  • My age is 35
  • I plan to retire at age 65
  • And, I plan to retire on $60k a year (in today’s dollars)

As I would have expected, even though the money is invested and still earning a fair amount in retirement (I believe the tool assumes 7-8% growth), the power of inflation hitting my expenses is just too much for my $600k retirement fund (as you can see in the chart above when the account plunges down to zero). 

The retirement fund only lasts till about age 85. And, if this model was built for a couple, chances are that one of them is still alive and without any money!

You obviously don’t want this to be you!

Want to learn how to protect yourself against inflation in retirement? Keep reading! Instead of being a slave to inflation in your elderly years, choose to tackle it head on and live an abundant, carefree life!

What Inflation Rate Should I Use For Retirement Planning?

Quick sidebar here. If you decide to use the more technical retirement tools (ie. enter in more numbers to get a more accurate result), you’ll want to know what rate to use for inflation. As I stated before, 3% is a good rule of thumb.

How to Protect Against Inflation in Retirement

Yes, inflation sucks. Thankfully, there are plenty of things you can do to fight it – to protect yourself against inflation.

losing to depreciationDon’t Hoard Cash

First off, that whole ‘hide your cash under the mattress’ thing – just don’t ever do that! Not only are you losing money to inflation, but if you have a fire, all that money is going to burn up and the insurance company likely won’t give you a dime for it!

Don’t Put All Your Faith in Bonds

The average U.S. Treasury Bond rate right now is 1.62%. 

If inflation is at 3% and the bond is paying out 1.6%, you’re still losing 1.4% on your money every year. Not smart.

Now, there are other bonds – with corporations for instance. You could earn roughly a 3% yield with a trustworthy corporate bond. The 3% is better than just holding cash, but it’s still doing nothing for you in terms of beating inflation. 

Finally, there are more risky bonds that may pay out a better yield. But, even with the greater risk, you’re still probably only looking at a 4-6% return on your investment. It’s okay to put some money here, but certainly not all of it. It’s simply not enough to win the war against inflation long-term.

Invest in Annuities

The next best idea to fight the inflation impact on retirement is annuities.

I honestly don’t know a ton about annuities, but essentially it’s a guaranteed return on a lump-sum investment.

Usually, these are offered by insurance and investment companies that know they could pay you 6% interest, but earn 10% or more by investing via more effective means (like the options we’ll soon get to below).

Annuities can certainly be used for part of your portfolio (after all, it’s a better option than bonds or cash), but again, I wouldn’t recommend that this be your ENTIRE retirement investment plan.

how much should I have in my 401kInvest in the Stock Market

If you’re serious about fighting inflation, then you’re going to want to earn 8% or more on your investments. One of the most effective ways to earn this type of yield has been through the stock market.

The S&P 500 (an index that follows many of the top 500 companies in the U.S.) has returned an average of 10-11% over the course of the last 100 years! Now that’s a pretty solid return on your investment!

More recently, the S&P 500 has done even better than the historic average – going up 50% or more over the course of a single year

Personally, I love index fund investing. The costs are low and the gains have matched the overall stock market almost exactly.

Want to know what I invest in?

I choose to invest in VFIAX, a Vanguard index fund that models the movement of the S&P 500. It’s been a fantastic investment since I started loading it up back in 2020!

Related: 5 Reasons Why Index Fund Investing is a Great Option for Beginners

Invest in Real Estate

Real estate was a great investment a few years ago. I was buying up houses and seeing an immediate 15% return on my investment by renting them out. Today, house prices are just too crazy expensive and the rents aren’t keeping up (meaning, you aren’t earning as much money anymore vs. the increase in purchase prices).

If you can find a steal of a deal somehow, then this route is an awesome one and I’d recommend it.

However, for many of us, we’ll just have to wait on real estate to make sense again before investing here.

Related: Where to Invest Your Money in 2021

storage rental businessStart Your Own Business

Last but not least, one other way to fight the inflation impact on retirement is to start your own business, then put your heart and soul into it, and sell it down the road for millions (this is actually one of the top 5 ways people get wealthy in America). I made it sound super simple right there, but of course making millions with a business venture isn’t easy. 

BUT, it IS possible.

And, if you can earn millions of dollars on a business, chances are you could find a way to invest it to fight inflation and have it survive your death in retirement.

Related: How to Start a Storage Rental Business (for easy passive income!)

Are You Ready to Fight the Impacts of Inflation?

Now you know what inflation is.

You know how it can inflate the cost of living to an obscene amount in your retirement.

And, you now have a tool that can tell you how long your money will last in retirement (with inflation already factored in!).

The question now is, are you ready to fight the impacts of inflation? Are you going to tackle this invisible enemy head on? Or, will you let it sneak up on you and take you down in your old age?

I suggest you use the tools that are at your disposal now, assume that inflation WILL happen, and start ramping up your investments if you need to.

Are you ready for inflation?

Grow Rich Investing Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

2 Comments

  1. I’m a bit older than you, Derek. I can remember when gas was 25 cents per gallon. As a 15+ years retiree I can testify to inflation. Especially this pandemic year, food costs have skyrocketed. 6 years ago, we moved into our custom built dream home. To build it today would cost at least 50% more due to lumber costs doubling or tripling depending on location. While I don’t think our medical costs have increased due to the actual charges, as we enter our 70s we are seeing doctors and physical therapists much more frequently than ever before. We used to be healthy but now shoulder, back and feet problems plague us. Another thing that for us has risen tremendously is the cost of long term care insurance. To maintain that is, in our opinion, absolutely necessary but it goes up every second year (in fairness so do the benefits increase).
    We have been fortunate and blessed to have sufficient income to handle our needs. We get a pension and Social Security. Cost of living adjustments have been made most years, but sometimes all it does is cover the cost of health insurance. And we have a very nice portfolio of stocks and bonds that throw off almost as much dividend and interest income as do our pensions. Our philosophy is we are allowed to spend the income but don’t touch the principle unless it is an extreme emergency. Its’ been working well for us so far.

    • The big key is investing appropriately to fight the impact of inflation! Sounds like you and your hubby are doing it wonderfully. Congrats! Stay frugal though. The costs will just keep going up!


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