Inflation and Retirement

Paul Ruedi

Over the past five years, retirees have experienced quite the inflation stress test. After a decade of inflation numbers hovering around 2% or even lower, inflation rose rapidly in the wake of the pandemic, peaking at 9.1% in June of 2022. Though it has slowed down since then, such a large amount of inflation in such a short time caused many retirees to understand and acknowledge how big of a risk inflation can be.

Inflation can be shocking to retirees. When people see price increases that surprise them, I think they often expect that these price increases are just temporary. But this is the particularly difficult thing for retirees to handle: once prices in the aggregate rise, they likely stay that way, and a new baseline for spending has been set for the rest of your life.

Retirement planners have known for a long time that inflation is one of the biggest threats to a happy retirement. That is because over a typical retirement, inflation will likely cause the cost to maintain the same lifestyle to double or triple.

This is problematic because many retirees get at least a portion of their spending from fixed income sources that don’t increase with inflation. When costs rise and income stays the same, a shortfall is created that will require the retiree to either cut spending or come up with income from other sources.

This is why it is essential for retirees to hold at least a portion of their wealth in what I call rising-income investments. For this, a diversified stock portfolio will usually do just fine. Rising stock prices and rising dividends enable retirees to have some increased spending throughout retirement.

From a planning perspective, it is also helpful for retirees to leave a little extra buffer room in their spending plans that will allow them to increase their spending with inflation. For example, even if you find you really “could” spend $100,000 per year, you may want to plan on spending $90,000 to leave room to increase spending if necessary.

Inflation is something we know will occur during a typical retirement, we just don’t know when or how much. A retirement spending plan that can handle many different types of inflationary environments is essential to retirees. That plan will likely need to be funded, at least partially, by a diversified stock portfolio. If you aren’t sure how to do that yourself, I encourage you to talk to a financial advisor or retirement planner.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.