An Expert Guide to Outsmarting Inflation: Don't Let It Restrict Your Retirement

When crafting a long-term plan, it's easy to focus on the numbers that feel solid — how much you earn, how much you save and how much you think you'll spend in retirement.

But the silent force of inflation is quietly eroding those numbers year after year.

Almost everyone understands the theoretical effects of inflation. They know that their Friday night pizza is $3 more this year than last, or those new tires on the car seem "so expensive" compared with the last time you replaced them.

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However, understanding what inflation is, compared with planning for it, are two very different things.

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As a financial planner, I often find that inflation is underestimated in planning conversations — especially when forecasting for retirement income, education funding or when estimating your required return on an investment portfolio.

Overlooking these powerful effects can lead to critical assumption errors in a financial plan, which often appear when it's far too late to course-correct.

Inflation's slow, relentless effect

Consider this: A retiree today who requires $100,000 to maintain their standard of living will need almost $165,000 in 20 years to cover expenses, even if inflation averages just 2.5%. This climbs to nearly $210,000 per year over 30 years.

This is the slow, relentless compounding effect of inflation — a force that can turn a plush retirement portfolio into a tight budget by your 80s.

Because of this, you must account for withdrawal rate plans. If you're withdrawing 4% from a $2 million portfolio, that's $80,000 per year.

But if you're increasing those withdrawals annually for inflation, as most retirees will need to do, your portfolio will experience greater strain.

Not only are you drawing down your capital, but you're also increasing distributions each year, expanding the risk of running out of money during your lifetime.

This leads to an important and often overlooked concept in investing called the real rate of return. Real return is your investment return after inflation.

Many investors fixate on achieving a 6%, 7% or 8% average return, but what truly matters is whether those returns outpace both inflation and withdrawals.

Suppose your portfolio earns a nominal 6% rate of return annually. If inflation is just 2.5%, your real return is only 3.5%. If you're withdrawing the standard 4% per year in retirement, you're depleting your principal, even with good market performance.

This is why maintaining an appropriate level of return, especially in retirement, is important.

One must resist the urge to invest overly conservatively in these years, instead focusing on constructing a portfolio designed to not just grow, but grow faster than both inflation and withdrawals.

Consider education strategies

Aside from retirement, things can really go awry when planning for education expenses. If you have children or grandchildren, education funding is likely one of your financial priorities.

The problem is this — education costs have experienced far higher inflation rates than the consumer price index (CPI) over the past several decades.

According to the Education Data Initiative, the average annual increase in public undergraduate tuition has averaged nearly 6% per year in the last three decades, well above the 2% to 3% average inflation rate for consumer goods over the same period.

This means a newborn today might face annual tuition costs well into six figures. Many families save into 529 plans or other accounts with the best intentions, but fail to adjust contributions for education-specific inflation, often leading to a shortfall when tuition bills come due.

Let's take the example of our newborn from above. If the parents figured annual tuition of $50,000 in today's dollars and assumed a standard 2.5% inflation rate on college expenses, they would have planned for a freshman-year tuition bill of just under $80,000.

However, if tuition inflation ran closer to 5%, that first-year bill would be more than $120,000, woefully short of their intended target.

Projections need to be realistic

Another related phenomenon we often run into as planners is overconfidence in projected asset figures.

If we're doing our job right and assuming appropriate rates of return, future account values can seem incredibly large when compared with today's spending power.

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This can cause one to overestimate their future lifestyle affordability, leading to complacency in savings rates and investment allocations that are too conservative.

Seeing a projection that you'll have $3 million in retirement can feel comforting, but if you don't account for inflation, that number can be dangerously misleading.

A 40-year-old office worker planning to retire with $3 million at age 65 using 6% returns might feel as if they're way ahead of the game.

But if inflation averages 3% over that 25-year period, that $3 million will have only have about $1.5 million of spending power in today's dollars. That planned retirement at age 65 can quickly turn into age 75.

Final thoughts

Inflation is not a temporary headline.

Whether you're planning for a child's tuition or your own 30-year retirement, the key is to model inflation explicitly. It should never be an afterthought.

Inflation can quietly sabotage a well-crafted strategy if ignored, so clients and planners alike should be using realistic, category-specific inflation rates, as well as modeling variable inflation scenarios against periods of high inflation, like the 1970s or 2021-22, to stress-test their plan.

By integrating inflation-aware assumptions into your cash flow projections, adjusting your investment targets and ensuring your withdrawals are sustainable in real terms, you can preserve your purchasing power, reduce financial anxiety and bring greater resilience to your long-term plan.

Bennett Pardue, CFP® offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN), offers investment advisory products and services through Equitable Advisors, LLC, a SEC-registered investment advisor, and offers annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC in CA; Equitable Network Insurance Agency of Utah, LLC in UT; Equitable Network of Puerto Rico, Inc., in PR). Equitable Advisors and Equitable Network are affiliates and do not own or operate New Canaan Group. PPG-8270816.1 (Exp 8/29)

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