Inflation doesn’t feel dramatic year to year, but compounded over a 20-30 year retirement, it can meaningfully erode what a fixed income actually buys.

Why this catches retirees off guard

A monthly income that comfortably covers expenses at 65 can feel noticeably tighter by 80, even if the dollar amount hasn’t changed, simply because the cost of everything else has risen around it. Healthcare costs in particular tend to rise faster than general inflation, which compounds the effect for retirees.

Sources of income that adjust automatically

Social Security includes annual cost-of-living adjustments (COLAs), which helps offset inflation to some degree, though critics note COLAs don’t always keep pace with the specific costs retirees face most.

Sources of income that generally don’t adjust

Many pensions and most annuity income streams (unless a specific inflation-adjusted rider was purchased) pay a level amount for life. That predictability is valuable, but it means the purchasing power of that specific income source declines over time unless it’s paired with other, more growth-oriented assets.

Ways retirees commonly address this

• Keeping a portion of savings invested for growth potential, even in retirement, rather than moving everything to fixed income at once.
• Choosing an annuity income rider with a cost-of-living adjustment option, if available, understanding it typically starts with a lower initial payment in exchange for future increases.
• Building in a margin between essential expenses and available guaranteed income, so a few years of rising costs don’t immediately create a shortfall.

Planning for inflation isn’t about predicting the exact rate years in advance. It’s about building enough flexibility into a retirement income plan that a range of outcomes can be absorbed without derailing your plans.

This article is educational and general in nature. It isn’t personalized financial advice.