While many significant financial news headlines have popped up from time to time in recent years, one topic consistently at the forefront is inflation; and although it’s decreased significantly (to 2.9%, through the twelve-month period ending in December 2024, as published by the Bureau of Labor Statistics) compared to highs of 7.0% in 2021 and 6.5% in 2022, the current rate still exceeds the federal inflation target of 2.0%.

By no means new, our recent inflation cycle follows a cyclical pattern. Should history repeat itself, we can expect several more periods of inflation in the coming decades—especially relevant as people generally live longer and spend more time in retirement than they used to.

It’s thus imperative to account for inflation in your post-work plans since failing to do so can derail your retirement lifestyle. This post details how to do just that.

What is inflation?

Inflation, the shifting price of products and services from one year to the next, represents a decrease in purchasing power: meaning you can buy fewer goods and services for the same amount of money.

For example, if inflation averages approximately 2.50% over the next five years, a $35,000 car you buy today would cost approximately $39,599 in 2030.

Inflation isn’t always bad, however; growing economies typically have modest inflation rates. The real danger, though, lies in the possibility that one’s income stays the same amidst rising prices—which can yield negative consequences, primarily for those who live on a fixed or limited budget (as many retirees do).

What causes inflation?

Inflation occurs when the total quantity of goods demanded increases more rapidly than the quantity of goods supplied at a particular price level. Several triggers exist; some of the most common are an increase in money supply (the total amount of money—cash, coins, and bank account balances—in circulation), shocks to the supply system, and a depreciation in the dollar’s strength.

An increase in the money supply means more people will have cash in their pockets and therefore buy more things. This expanded funding can come about via various measures such as when the Fed buys government securities from commercial banks and institutions or lowers interest rates (encouraging investments) or through government fiscal policy (excess spending or tax cuts).

Supply shocks also contribute to inflation. For example, if significantly less oil is produced due to war or natural disasters, the cost of energy will increase—provided similar demand exists.

Exchange rate movements can also impact inflation. For example, a decrease in the dollar's value drives up the price of imported goods for American consumers, who may thus shift to buying domestic brands; though since American exports are now also cheaper for residents of foreign countries, the increase in aggregate demand puts pressure on production capacity (causing firms to eventually raise their prices).

How inflation can impact your retirement

Aside from day-to-day purchase impacts, inflation can also adversely affect retirement in many other ways. Some of the most significant include…

Social Security benefits

The Social Security Administration (SSA) is required by law to prevent inflation from eroding the purchasing power of benefits paid to recipients. They do this via a cost-of-living adjustment (COLA) based on the Consumer Price Index (CPI-W), which tracks retail prices and their effect on urban hourly wage earners and clerical workers. The SSA announces this cost-of-living adjustment every October and stated that in 2025, the increase will ring in at 2.5%.

One way to think of COLA is like a raise in your paycheck. Although the "raise" only covers the cost of inflation, you'll often see a yearly boost in your benefits.

COLA may sound great on paper, but the purchasing power of Social Security has in fact eroded over time. According to the Senior Citizens League—one of the nation’s largest nonpartisan groups for seniors—Social Security benefits have lost 20% of their buying power since 2000. How could that be? you may think to yourself. Put simply, the CPI-W under-weights specific sectors that have experienced very steep prices (e.g., prescription drugs, homeowners’ insurance and property taxes, Medicare premiums, and fresh fruits and vegetables).

Healthcare expenses

Medical care inflation has consistently risen much higher than the overall inflation rate over the previous decades. In fact, since 1947, this specific sector has experienced an average annual inflation rate of 5.36% (per the U.S. Bureau of Labor Statistics) compared with 3.68% for the overall rate.

This trend is primed to continue, with the Henry J. Kaiser Family Foundation expecting per-capita spending to grow at an annual rate of 4–5% through 2031. Consequently, out-of-pocket healthcare costs and unexpected medical expenses will continue to increase, putting a strain on the budgets of many Americans.

Savings & investments

Let’s assume you plan on retiring in twenty years and that you’re saving $500 per month ($120,000 total) and earning an average annual return of 7%—a number in line with historical trends.

In this scenario, you’d end up with $261,982.70. Assuming a 2.5% inflation rate, the future value of your $261,982 rings in at $159,880: meaning you won’t be able to buy as many goods and services as you might think.

How to plan for inflation in retirement

You can manage inflation risk during retirement in various ways. While specific situations naturally vary from person to person, common planning strategies include…

Managing your costs

According to the latest Consumer Expenditure Survey, the average retiree household spends $60,087 annually. The biggest expense? Housing, which extends to mortgage, rent, property taxes, insurance, maintenance, and repair costs and represents over 36% of annual retiree expenditures.

Paying off your mortgage and building equity before retirement is an excellent first step, giving you more breathing room with respect to spending—especially on necessary items adversely impacted by inflation.

You should also prioritize paying down high-interest debt since, as inflation rises, the Fed often raises interest rates—which, consequently, can make high-interest rate debt even more expensive to eliminate.

Optimizing Social Security benefits

The age at which you begin collecting Social Security impacts your monthly benefit amount. If you opt to do so before reaching full retirement age (when you’re entitled to 100% of your benefits), for example, your monthly benefit will be permanently reduced as a result.

To be more specific, Social Security benefits increase by approximately 7% each year between age 62 and your full retirement age (with this number climbing to around 8% each year between your full retirement age and age 70). In this case, continuing working or relying on other retirement income sources is often beneficial until you reach age 70.

Diversifying your portfolio

To help hedge against inflation, consider adding a few investments to your portfolio that have performed well historically in inflationary environments. Such examples include:

· Bonds: Treasury bonds such as treasury-inflation protected securities (TIPS) or Series I savings bonds are a solid choice, as they feature a variable rate of inflation that adjusts semi-annually based on Consumer Price Index for All Urban Consumers (CPI-U) changes.

· Metals: Gold, traditionally a safe haven for investors during times of inflation upswings, tends to perform well when real interest rates (interest rate minus inflation) are negative.

· Real estate investment trusts: Also known as REITS, real estate investment trusts are companies that own, operate, or finance income-producing real estate across a wide range of sectors. A REIT typically collects money—such as rent from tenants or interest from investments—and then distributes the same as dividends to shareholders.

· Real estate income: As inflation rises, property values and the amount of money a landlord can charge for rent often follow suit.

· Commodities (non-gold): Although commodities are highly volatile, some—including energy (oil and gas), agriculture and livestock, and industrial metals—have responded well to higher inflation historically.

· Annuities: While annuities aren’t for everyone, an inflation-protected annuity (IPA) guarantees a rate of return at or above inflation.

How much of each asset class you should add to your investment portfolio varies from person to person, so we recommend speaking with a financial advisor to help you determine the most appropriate asset allocation for your needs.

Not retreating excessively to cash

It may be tempting to sell some of your assets (stocks, etc.) and hold on to stable-sounding cash during volatile and uncertain times, but it’s impossible to time the markets: meaning you may miss out on significant earnings and thus lose out substantially in the long run.

In sum: managing inflation risk in retirement

Inflation, one of many potential risks you'll need to prepare for in retirement, is a surefire occurrence and must be planned for accordingly. Consulting with a financial professional is a great way to start.

Have questions about your investments or inflation, specifically? Schedule a FREE discovery call with one of our CFP® professionals.

Investing During Inflation: How to Manage Your Risk