How Does Inflation Affect Retirement Planning

By: Mark Williams, CEO Brokers International 

Over the last few months, one of the biggest issues impacting financial considerations has been the record level of inflation in the United States. Because of this, many people are asking the question, “How does inflation affect retirement planning?”

There are a lot of factors to consider, but let’s look at how to survive inflation risk and see how you can protect your retirement income.

How Will Inflation Affect My Retirement?

When saving money for retirement, most people have an expectation for what their projected retirement accounts will provide them. However, money over time offers less buying power because of inflation, and we’re in the middle of some of the highest inflation on record. In fact, the U.S. Bureau of Labor Statistics reported in January that the consumer price index rose 7.5% over the preceding 12 months — the highest increase since 1982.

Many retirees have fixed incomes — a category of people who may be hurt by inflation the most. How does inflation affect individuals living on fixed income? And what does that mean for retirement? Let’s take a look.

In retirement, you’re often living off of a relatively fixed income — you draw down your 401k at a consistent rate, receive set Social Security or annuity payments, take required minimum distributions, and the like. You would ideally be able to maintain that fixed income over the full period of your retirement so you don’t run out of money too soon.

However, the value of your accounts is directly affected by inflation because it reduces the purchasing power of your money. Let’s say you’re on track to have $1,000,000 in your various retirement accounts when you retire 20 years from now. A million dollars sounds like it would go a long way. But even if we assume a drop from the current inflation rate back to the historical average (3.25% between 1914 and 2022), in 20 years the value of your retirement nest egg would only be worth about $530,000 in today’s money.

Another way of looking at it is how much money you’d need to save to match the purchasing power of $1,000,000 today. To have the equivalent of $1 million in today’s money, your accounts in 20 years would need to total just under $1.9 million.

Fortunately, we’re unlikely to see long-term inflation remain at the current record levels. Still, it’s clear that you need to factor in inflation risk when saving money for retirement.

How To Protect Your Money From Inflation

Clearly, when planning for retirement inflation needs to be given serious consideration. There are a number of elements to consider. I’ll only cover a few here — I highly recommend discussing more specific strategies to cope with inflation with a financial professional.


There’s no guaranteed rate of return on investments, which makes many people cautious to put their retirement savings into the market. However, consider the fact that savings accounts, CDs and other similar vehicles earn very little interest and are likely to be outpaced by inflation. Carefully weigh your asset allocation — it’s good to have some low-risk vehicles, but you’ll still wind up losing purchasing power if your money grows at 0.5% annually compared to 3% inflation.


As investments, 401k accounts offer no guarantee on their rate of return. You can look at historical returns to get a sense of where they’ll go, but it’s ultimately predicting the future to assume a certain growth percentage year over year. If you want to try to stay ahead of inflation, you will want to diversify your investments so that you aren’t overly dependent on any single investment.

Additionally, talk with a financial professional about adjusting your glide path if you have a target date 401k. Although individuals close to retirement typically want to shift their assets from high-growth/high-risk opportunities to low-yield but safer investments (bonds, money market, etc.), you may want to consider keeping a higher percentage in those growth opportunities to hedge against inflation risk.


I’ve written before about using life insurance for retirement savings, but here as well you should consider the impact of inflation. In particular, inflation tends to have a greater impact on term life policies than on whole life policies. If you’re using life insurance to help protect the value of your retirement savings, remember that the purchasing power of your policy will decline over time. That same example we looked at before, of a $1,000,000 nest egg, applies for life insurance as well.

A term life insurance policy does not keep pace with inflation. Even if you look at the Federal Reserve’s target inflation rate (2%), as opposed to our current levels, term policies are significantly impacted. If you purchase a $1 million policy with a 30-year term and die in the final year of the policy, your beneficiary’s $1 million death benefit will be worth only $552,000 in today’s money.

Whole life insurance policies, on the other hand, do grow over time. Although these policies are more expensive to purchase, they offer that long-term growth advantage over term policies, and they do not expire at the end of the term. On average, whole life policies outpace inflation and provide lasting security, and they may be worth considering as part of your overall financial planning strategy.


While it’s impossible to predict inflation rates, you can comfortably assume that inflation will continue to be a factor impacting your money and your retirement strategy. Because of that, you should look for ways to curb the effects of inflation in your retirement, such as by reducing your housing costs, moving to a location with a lower cost of living, take care of your health to reduce future health care costs, and start saving for retirement as soon as possible to let your money grow.

So to return to our original question: How does inflation affect retirement planning? As we’ve seen, it poses significant retirement planning risks. Indeed, it can even seem like it undercuts some of the benefits of saving money for retirement. But with the right approach and the help of a financial professional, accounting for inflation in retirement planning and protecting retirement assets is possible.

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