Projecting your annual income needs in retirement is key to determining if you’ve accumulated enough in your retirement savings. It may seem easy to estimate the income needed to meet costs in the first years of retirement, but what about the fifth, 10th or even 30th year?

One of the key variables to consider is how inflation—increases in the cost of living—will affect your income needs. The loss of purchasing power as higher costs eat into your savings is one of the most significant risks facing retirees, especially given today’s longer life expectancies. Over the course of a retirement that lasts 20 to 30 years or more, living costs can be expected to double. The impact could be even more dramatic.

The painful impact of inflation

Until recently, inflation did not garner many headlines because the rate of inflation remained modest, mostly in the 2% to 3% range per year. But in 2021, the cost of living (as measured by the Consumer Price Index) rose 7%.1 This unanticipated spike is a reminder that inflation can become an important and surprising concern at any time.


Have you protected your retirement from the potential impact of higher living costs?


Consider these examples to understand the potential impact on your retirement income:

  • A person who retired in 1996 with annual income needs of $50,000 had to generate income of nearly $88,000 to enjoy a comparable lifestyle in 2021. This was during a period when the average inflation rate was just 2.4%. This represents a very favorable inflation environment.
  • The situation can be more challenging. A person retiring in 1965 on $50,000 per year needed $210,000 to have the same purchasing power 25 years later. This was a period when the annual inflation rate averaged nearly 10%.
Can your income keep pace with inflation?

Have you protected your retirement from the potential impact of higher living costs? Social Security may provide some protection, as benefits are adjusted annually to reflect the inflation rate. But how about income you plan to draw from your own savings?

Think about a way that your assets could continue to generate growth and increase in value over time. Typically, this requires investments in equities, which are subject to more volatility and changes in value than other types of assets. You may not be comfortable taking such chances with your portfolio. If equity markets decline significantly, it could reduce your nest egg and affect the amount of income you can afford to withdraw from your savings in retirement.

Another consideration to help address this risk is using an annuity. An annuity can offer protection for your principal and the ability to generate inflation-adjusted streams of income over the course of your retirement.

While it’s difficult to predict whether inflation will continue to be a problem in the future, it’s important to understand what it can mean for your investments and consider solutions that can help maintain your lifestyle in retirement. A financial professional can work with you to design a financial plan that’s aligned with your goals for the future and can help protect your future purchasing power.

Share on