You’ve set your goals, built your savings plan, and started mapping out your golden years. But have you figured out how to account for inflation in retirement planning?

Inflation might seem small year to year, but over time, it chips away at your buying power. What feels like a comfortable nest egg today might not stretch as far in 20 or 30 years. That’s why understanding how much you’ll need for retirement with inflation is essential.

In this guide, you’ll get a breakdown of how inflation affects retirement, how to account for it in your planning, and the tools and strategies you can use to keep your future financially secure.

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Understanding the Impact of Inflation on Retirement

Inflation refers to the general increase in prices over time, which reduces the purchasing power of money. Historically, the U.S. has experienced an average annual inflation rate of about 3%.

This is an overview of trends:

• 1917: Inflation reached 20.49%, the highest since the introduction of the Consumer Price Index (CPI), largely due to World War I expenses.
• 1929–1933: During the Great Depression, the U.S. experienced significant deflation, with prices falling by approximately 10% annually.
• 1946: Post-World War II demand led to an inflation rate of 18.1%.
• 1970s: The decade saw high inflation, peaking at 13.5% in 1980, driven by oil crises and economic policies.
• 1980s: Inflation rates declined, averaging around 5.6% in the early part of the decade, due to tight monetary policies.
• 1990s: A period of relative stability, with inflation averaging about 3%.
• 2008–2009: The financial crisis led to low inflation and concerns about deflation.
• 2022: Inflation spiked to 9.1% in June, the highest since 1981, influenced by pandemic-related supply chain disruptions.
• 2024: Inflation moderated to 2.9% by December, aligning closer to the Federal Reserve's target.
  

Let's say you bought something that costs $100 today. It could cost $181 in 20 years if inflation averages 3% annually. Over 30 years, that same item could cost $242.

For retirees, this gradual increase in prices will impact their savings. Without adjustments, a fixed retirement income may not suffice to cover future living expenses. If retirees understand how to account for inflation in retirement planning, financial security won't be out of reach.

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How to Account for Inflation in Retirement Planning

To effectively plan for retirement, it's important to consider the impact of inflation. Here are some practical steps:

• Use inflation estimates. Most assume an annual inflation rate of 2–3% when projecting future expenses.
• Adjust projected expenses annually. Regularly update your retirement budget to reflect changes in the cost of living.
• Build flexibility into your budget. Allocate funds for unexpected expenses and consider varying your spending based on inflation trends.

You can use a retirement inflation calculator to estimate future costs. These calculators can account for inflation, so you can see if your savings plan remains on track.

Always keep in mind that these tools have limitations. For personalized assistance, consider exploring retirement planning services. These services provide tailored strategies to address inflation in your retirement plan.

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Tools and Strategies to Combat Inflation

When preparing for retirement, you need more than just a savings goal. You need a strategy that protects your money from losing value over time. Below are key tools and strategies that help combat inflation and support long-term financial health.

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Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds that adjust their principal based on inflation. They’re designed specifically to protect against rising prices.

You might find them especially useful if you're building a bond-heavy retirement strategy and want protection from inflation shocks.

Including Treasury Inflation-Protected Securities in your portfolio can be a smart way to preserve purchasing power in retirement:

• The principal value of TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.
• Interest payments are made twice a year, and the calculations depend on the adjusted principal. So, as inflation rises, both your investment's value and your interest income grow.
• Many consider TIPS low risk because the U.S. Treasury backs them.

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Annuities with Inflation Protection

Annuities provide guaranteed income for life, which can bring peace of mind in retirement. Some annuities have inflation protection built in. With an inflation-protected annuity, your payouts increase every year based on a set rate or actual inflation. This feature helps ensure that your income doesn't lose value over time.

Not all annuities offer this protection, and those that do may come with higher initial costs or lower starting payouts. Still, if your goal is to secure predictable income that keeps up with inflation, it's worth exploring.

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Diversified Investment Strategy

A diversified investment strategy can spread risk and help your savings keep pace with rising costs. The right mix of assets can serve as a natural hedge against inflation. Consider these categories:

• Stocks, especially dividend-paying ones, have historically outpaced inflation over the long term. Companies can raise prices, helping revenues grow with inflation. And dividend income can increase over time, giving you a growing cash flow.
• Real Estate Investment Trusts (REITs) often perform well during inflation because property values and rents tend to rise with the cost of living. These investments also offer regular income distributions, making them appealing to retirees.
• Commodities and precious metals (e.g. agricultural goods, real estate, and especially gold) often hold their value when inflation rises. They can add a layer of protection when paper assets decline in real value.

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Estimating Your Inflation-Adjusted Retirement Needs

To determine how much you’ll need for retirement with inflation, follow these steps:

1. Assess current living expenses: Calculate your annual spending today.
2. Estimate the number of years until retirement: Determine how long your money needs to last.
3. Apply an expected inflation rate: Use a conservative estimate, such as 3% annually.
4. Calculate future expenses: Adjust your current expenses for inflation over the retirement period.

Utilizing a retirement inflation calculator can simplify this process, providing a clearer picture of your future financial needs.

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Adjusting Your Retirement Plan Over Time

Regularly reviewing and updating your retirement plan is crucial to account for inflation and other changing circumstances. Here's how to stay on track:

• Monitor inflation trends: Stay informed about economic indicators that affect the cost of living.
• Adjust contributions and investments: Increase savings rates or reallocate assets to maintain purchasing power.
• Review withdrawal rates: Ensure your withdrawal strategy aligns with current inflation rates to sustain your savings.

These simple steps can help you avoid common missteps and financial regrets of seniors.

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Future-Proof Your Retirement Plans

Inflation can impact your retirement savings. With proactive planning and regular adjustments, you can maintain your desired lifestyle. It's essential to see the big picture, considering how inflation affects every aspect of your financial future.

To ensure your retirement plan is robust and inflation-resistant, get a free portfolio review today.

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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

Investments in commodities can be volatile. Allocating more than 5%–10% of a portfolio to commodities may reduce the diversification benefits. A REIT is a complex and sophisticated investment vehicle for individual investors to invest in large scale income producing real estate portfolios. Certain types of REITs are illiquid and only available to accredited investors who meet certain minimum statutory financial qualifications.  REITs involve various risks and uncertainties.In addition to consulting with a financial professional, investors should carefully consider their financial objectives, risk tolerance and familiarize themselves with all risks associated with REITS and commodities prior to  investing.

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