I remember when a movie ticket cost $4. I also remember when my back didn't hurt when I got out of bed, but that’s a story for another day.
Back in 1995, I could take a date to the movies, buy a large popcorn (with extra butter, obviously), and two sodas for under $20. Today? That same outing requires a small loan.
We all joke about how "back in my day, a candy bar cost a nickel," but when it comes to retirement planning, this isn't just nostalgia. It’s a mathematical threat. It’s called Inflation, and it is the single biggest danger to your retirement nest egg.
The "Million Dollar" Illusion
"I want to be a millionaire."
It has a nice ring to it, doesn't it? For decades, that was the magic number. If you hit $1,000,000, you were set for life. You could sip margaritas on a beach until you were 100.
But here is the cold, hard truth. A million dollars isn't what it used to be. And by the time you retire, it will be worth even less.
If you are 30 years old today and you plan to retire at 65, you have 35 years of inflation ahead of you. Let’s say inflation averages just 3% a year (which is the historical average). Do you know what $1,000,000 in 35 years will buy you?
It will buy you roughly the same amount of stuff that $355,000 buys you today.
Suddenly, being a "millionaire" doesn't feel like a yacht lifestyle. It feels more like a "budget sedan" lifestyle.
How Inflation Erodes Purchasing Power
Inflation is just a fancy word for "prices going up." But I like to think of it as "money getting weaker."
Every year, your dollar loses a little bit of its muscle. It can’t lift as much weight at the grocery store. It can’t push as much gas into your tank.
The Rule of 72 (The Scary Version)
You might know the Rule of 72 for investment growth (divide 72 by your return rate to see how fast your money doubles). But you can use it for inflation, too.
Divide 72 by the inflation rate to see how fast your costs double.
- At 3% inflation: Prices double every 24 years.
- At 4% inflation: Prices double every 18 years.
- At 5% inflation: Prices double every 14 years.
- At 6% inflation: Prices double every 12 years.
This means if you retire at 60 and live to 84, the cost of everything (bread, milk, electricity, property taxes) will likely double during your retirement. If you need $50,000 a year to live on day one, you might need $100,000 a year to live the exact same lifestyle in your 80s.
Inflation in Retirement Planning: The Double Whammy
When we plan for retirement, we often make the mistake of thinking in today's dollars. We look at our budget and say, "Okay, I spend $4,000 a month. So I need $4,000 a month in retirement."
Wrong.
First, there is general inflation (food, housing, clothes).
Second, there is Lifestyle Inflation (we tend to spend more as we earn more, but hopefully, we curb that in retirement).
Third, and most dangerously, there is Healthcare Inflation.
Medical costs have historically risen faster than regular inflation. It's often 5% or 6% a year. And guess what you spend more money on as you get older? Healthcare. It’s a cruel joke, but you have to plan for it.
Using the Simulator to Adjust for Inflation
I didn't build the Retirement Savings Simulator just to show you happy numbers. I built it to show you the truth. And the truth includes inflation.
When you use the tool, look for the "Inflation Rate" input.
- The Default: We usually set it to 3%. This is a safe, conservative average over the last century.
- The Stress Test: Try bumping it up to 4% or 5%.
I want you to try this right now.
- Run your simulation with 3% inflation. Note your "Success Rate" and your "Projected Savings."
- Change it to 4%.
- Watch what happens.
You will likely see your money run out years earlier. That tiny 1% difference compounds over decades to eat a massive hole in your savings. It’s sobering, but it’s better to know now than when you’re 75.
Protecting Your Nest Egg: How to Fight Back
Okay, enough doom and gloom. Inflation is a beast, but you can tame it. You just need the right weapons.
1. You Must Invest for Growth
This is the most important lesson. You cannot hide from inflation in a savings account.
If your bank pays you 1% interest and inflation is 3%, you are losing 2% of your wealth every single year. You are safely going broke.
To beat inflation, you need assets that grow faster than inflation. Historically, that means Stocks (Equities) and Real Estate.
- Companies can raise their prices when inflation hits. So their profits go up, and their stock price goes up.
- Landlords can raise rents. So real estate income keeps pace.
This is why even a 70-year-old retiree needs to have some money in the stock market. You need that growth engine to keep up with the rising cost of living.
2. Treasury Inflation-Protected Securities (TIPS)
The government actually sells bonds that are designed to fight inflation. They are called TIPS. When inflation goes up, the value of these bonds goes up automatically. They are a great "safe" bucket for a portion of your portfolio.
3. Delay Social Security
Social Security is one of the few income sources that is automatically adjusted for inflation (COLA). The longer you wait to claim it (up to age 70), the bigger your monthly check is. And the bigger that inflation-adjusted safety net becomes.
Takeaway: Don't Panic, Just Plan
Inflation is like the weather. You can't control it, and sometimes it storms. But you wouldn't build a house without a roof, right?
Don't build a retirement plan that ignores inflation.
- Assume your costs will go up.
- Invest in things that grow.
- Use the simulator to test your plan against a "high inflation" world.
If you do that, you won't be the old guy complaining about the price of a movie ticket. You’ll be the one buying the large popcorn anyway because you planned for it.