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Keep Inflation From Eating Your Savings

Nov 17, 2020 3 min read

Key takeaways

  • Inflation cuts your purchasing power over time.
  • Higher-risk investments (like stocks) can help your money outpace consumer prices.
  • Rising health care costs make taming inflation even more important.


Planning for retirement inspires a range of questions and concerns. From budgeting how much to contribute to your savings to choosing investments that reflect your risk tolerance and time horizon, it can take time to understand it all.

However, one critical threat to a comfortable retirement is also one of the most overlooked: inflation. That’s because it’s a financial phenomenon that forces you to plan in the first place.

Here’s a look at what inflation is, what it means for your financial planning, and how you can help protect yourself against it.



Inflation defined

Inflation essentially describes the rising cost of consumer goods and services, such as groceries and rent, over time. It’s why $1 can buy you more coffee today, for example, than it will tomorrow.

Some inflation is good—it’s often a sign of a strong economy. But it could also mean that in 30 years, that $1 won’t be able to buy you much coffee at all.


  1. 1. Inflation impacts your spending

    This dynamic has drastic implications for how much you can expect to spend in retirement. Say you currently spend $20,000 a year on food and housing. If you hope to spend the same amount in retirement, you’ll have to drastically decrease your day-to-day expectations. That’s because today’s $20,000 won’t go as far in 20 years.

    The average annual inflation rate over the past century is 3.15%, according to Inflationdata.com. And even though average inflation hasn’t hit that level in the past few decades, in the next 20 years, the prices of goods and services could still essentially double. So, to live the same lifestyle you have now, if you’re retiring in 20 years, you’d need about $40,000 to meet that current budget for food and housing.


  2. 2. Without risk, your money won’t grow fast enough

    To get past this hurdle, you have to take on some risk with your investments. It’s why you can’t simply take your retirement savings, place it under a couch cushion, and wait to use it when you’re ready. Because your purchasing power is likely to fall as prices rise over time, you want your money to grow faster than inflation.

    To do so, consider placing some of your savings in stocks. If you’re investing through your company’s 401(k) or other retirement plan, there’s a good chance that some of your portfolio is already in stocks. While this means you could see some more potential movements in your savings, over time the market has historically far outpaced inflation. According to data compiled by NYU’s Stern School of Business, the average annual return for stocks from 1928 to 2015 was 9.50% (before, of course, inflation).


  3. 3. Longer life spans, higher health costs

    The longer you live, the more you have to worry about inflation, because over more years, inflation has more time to grow.

    Our overall life spans have significantly increased over the past century. But with extended life comes more medical expenses, which also rise with inflation.

    Health care costs could rise 5.4% a year through 2028, according to the Centers for Medicare and Medicaid Services. And even at a lower projected inflation rate (4.4%), a 40-something couple can expect to shell out nearly $456,000 on health care in retirement, according to HealthView Services. What's more, women (who tend to live longer then men) can expect to pay some $200,000 more than their male counterparts. (Everyone’s situation is different, of course, but it’s important to consider when planning for your future.)

    Even those nearing retirement now may want to keep at least some of their portfolio in equities (stocks) or other investments that have the potential to grow over the 20 to 30 years in retirement, so their assets may see returns that beat inflation.


What you can do next

Inflation is a fact of life. But by understanding how it can eat your savings, you can plan and help protect your money from it. By increasing your risk levels (with stock investments), you help give your money the potential to outgrow inflation over time.

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