How Big of a Threat Does Inflation Pose to Your Retirement?

You might be surprised how much inflation can nibble away at your retirement nest egg over time if you aren’t prepared.

A stack of $100 bills has a bite out of it.
(Image credit: Getty Images)

As America’s economy reopens, we’re seeing higher inflation rates, and this unwelcome surge should prompt retirees to consider the threat it could pose to their financial security.

The 5.4% rise in the consumer price index in the last year marked the highest inflation in almost 13 years. If you remember the soaring, double-digit inflation rates of the 1970s, you may be worried now. However, even if inflation never reaches those levels again, you still need to consider the eroding effects it has on your nest egg over the long haul.

How Much Will Your Money be Worth in 10 or 20 Years?

Even moderate inflation can have a significant effect on a retiree’s savings. The Federal Reserve’s target inflation rate is 2%, but the Fed has said it will allow inflation to rise above that mark for some time. Let’s take a look at how an average annual inflation rate of 3% over the next 20 years would impact your finances.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

If you needed $60,000 for your first year of retirement, in 20 years you would require $108,366.67 to match today’s purchasing power of $60,000. Another way to look at it: At 3% annual inflation, that initial $60,000 would be worth only $33,220.55 in 20 years.

You need to factor inflation into your retirement plan because you can expect that everyday items, travel and other expenses will continue to rise in cost. Inflation erodes the value of savings and will continue to do so after you retire. Considering the near-zero interest rates of savings accounts, retirees who are living off their savings are especially vulnerable to high inflation. Therefore, it’s important to assess your investment strategy and retirement income plan to see if you’re protected against inflation for the long term.

Social Security Is Not Keeping up

The Senior Citizens League estimates that the average Social Security benefit has lost almost a third of its buying power since 2000 because benefit increases have not kept up with the increasing cost of prescription drugs, food and housing. This has occurred despite yearly cost-of-living adjustments (COLAs) for Social Security benefits that are meant to make benefit amounts keep up with inflation.

Social Security beneficiaries saw a relatively high cost-of-living adjustment (COLA) of 2.8% in 2018 (for the 2019 benefit year). In 2020, they saw a 1.3% increase (for the 2021 benefit year). In some years, the COLA adjustment has been nonexistent or practically so. It was 0.3% for 2016 and 0% for 2015. Lawmakers have proposed changing how COLAs are calculated to make benefit increases better reflect the price increases older Americans see.

Consider what would happen if all your retirement income lost a third of its value over the course of 20 years. Would that scenario make it more likely that you will run out of money?

What can You Do?

So, how can you know how much income you will need in retirement when inflation insists on complicating the situation? Here are some things to keep in mind:

  • First, consider any fixed-income sources in retirement that will not likely keep pace with inflation. In the process, consider how much interest you are earning from money in a savings account or CD. It’s unlikely that we will see a substantial interest rate hike in the next few years, so be prepared to continue earning little interest. It’s important to assess your investment strategy and retirement income plan to see if you’re protected against inflation for the long term.
  • Next, calculate how much your nest egg is right now. As you do, factor in inflation over the next 10, 20 and 30 years. Consider that while overall inflation rates may fall from what they are now, that might not be true for some of the specific goods and services that could take a large chunk of your income, such as energy, food or health care and long-term care costs.
  • Consider whether your current investment strategy will need to change once you retire. You may want to contemplate a strategy that continues to grow your money in retirement, so when transitory events like inflation hit, you’re covered. Foundationally, a solid plan ensures that your purchasing power needs are always met. Some people may need to take on less investment risk once they near and reach retirement. However, having the right risk asset allocations for your particular situation could help combat the eroding effects of inflation on your nest egg over the course of your retirement.

Finally, consult a professional. Today’s retirees face a triple threat of potentially high inflation, persistent low interest rates and an unpredictable market. We could see the aftereffects of the pandemic for years to come, so make sure you have a solid retirement plan in place to help you weather storms like rising inflation.

Dan Dunkin contributed to this article.


Solutions First Financial Group is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Solutions First Financial Group are not affiliated companies. Investing involves risk, including the potential loss of principal. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Our firm is not affiliated with the U.S. government or any governmental agency. 1021352 – 8/21


Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Solutions First, Inc. are not affiliated companies. The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Joseph Donti, Investment Adviser Representative
Founder, Solutions First, Inc.

Joseph Donti is the founder of Solutions First, Inc. He is a Investment Adviser Representative and specializes in planning and asset preservation. He has passed his Series 65 exam and holds life and health licenses in Arizona. He and his wife, Patty, the company co-founder, have three children and four grandchildren.