Recent Inflation and Retirement in Simple Terms

A recent report indicates that issues with inflation are starting to get better, but consumers are still seeing increases in the prices of basic needs like gas and groceries.^[1] The rate that things are becoming more expensive has slowed down and has been for some time. But things are still becoming more expensive.^[1] You have probably noticed this at the pump and in line at the grocery store. Things keep costing more.

If you are headed toward retirement or are currently retired, it can be very important to keep an eye on inflation.

Small increases in inflation are expected over time.^[2] In a situation with stable inflation, you likely would not notice very much change from day to day as you purchase things. Over small periods of time, steady inflation is almost invisible. However, you may notice that there has been a significant price change over the course of your entire lifetime. For example, you used to be able to buy a piece of candy for a penny, and now a single candy bar can cost about a dollar. And although that change is obvious and significant looking back 60 years, it took a long time for us to get to the one-dollar candy bar.

A slower rate of inflation is good for retirees because you will be making the exact same amount of money for a long time. Here’s an example to explain:

Let’s use the candy bar as an example. Let’s say you need one candy bar a week to be happy during your retirement. Your retirement plan is scheduled to pay you $1 a week for the rest of your life, so you can easily afford one candy bar a week at the start of your retirement. After 20 years of retirement with slow inflation, a candy bar now costs about $1.10. Your retirement plan is still paying you $1 a week. This means that you’ll still be able to afford a candy bar most weeks. You may have to skip a candy bar every now and then, but almost every week you’ll have the candy you want. So, slow inflation rates are good for retirees: it means your money can still buy you the things that you need.

Large increases in inflation can be a major problem for retirees. Let’s look at the candy bar example again. Let’s say after 20 years of retirement with high inflation a candy bar costs $4. You are still only getting $1 a week from your retirement. This means you’ll only be able to afford a candy bar every four weeks. In retirement, Social Security provides cost-of-living adjustments that are based on inflation rates, but they aren’t guaranteed to cover everything Social Security is only meant to cover about 40% of your income needs.³ That is why high rates of inflation are bad for retirees: in an economy with high inflation rates, your income doesn’t always rise with the cost of goods, and it can become difficult to afford what you need. (Note: This may also change and is not always guaranteed to be the case.)

The recent news about inflation increases slowing is good news. It could mean that things are headed back toward a favorable economic environment for retirees, but we are not quite where we need to be yet. If you have questions about inflation and how it may affect your financial future, contact us today to get a complimentary review of your financial plan.