What Do You Know About Inflation Risk? Probably Not Enough


The “I” word has been all over the place lately, as federal policymakers push for more aggressive spending and economists worry about the impact that all of this cash flying around will have on the cost of living.

Inflation is here; what happens next is anyone’s guess.

What does all this mean for retirement planning? Think about this: According to the data, a 65-year-old who retires today can expect to live 20 more years or more. Using a modest 3% rate of inflation, the cost of living could double in under 25 years.

Have you saved enough for that? 

What the Experts Think: “I think that the scare right now is probably going to abate a bit as we go through the next year, but I think in the long run, are we going to see inflation … above 2%? I think the Fed is going to succeed in doing that.” William Dudley, former president and CEO of the Federal Reserve Bank of New York.

The Risk is Real: In an inflationary environment, Social Security simply isn’t going to keep pace with the cost of living becuase the benchmarks that the SSA uses to set those increases famously underestimate the actual rate of inflation. Case in point: From 2000-2018, the cost of drugs commonly prescribed for older adults rose 188%, but at the same time this spike caused the purchasing power of Social Security to fall by 34%.

The same holds true for 401(k) and profit-sharing plans, which don’t adjust to inflation as easily as traditional pensions do. That leaves retirees at risk of falling short in their saving, particularly as they get close to actually retiring.

The Lesson? Inflation comes and inflation goes. At the moment, it looks like we’re going to get a bit more. But in a few years that might change. The best advice, as always, is to consider all your options and keep your eyes open. Don’t be passive in the face of this threat to your retirement. 

At the same time, delaying retirement to weather this period can make sense too, getting you past the period of reduced purchasing power while continuing to add to your retirement balance.


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