The Top 3 Ways Inflation Affects Your Retirement

Maura Schauss |

By Todd I. Youngdahl, CFP®

Inflation is known as retirement’s silent killer because you typically never see it coming. It creeps up on you, little by little, until you realize one day that a new car bought in the ’70s for $3,500 would cost roughly $40,000 today.

If you’ve spent any time watching the news, you’ve probably heard phrases like “persistent inflation” and “transitory inflation” being tossed around in light of the coronavirus pandemic. Transitory inflation[1] is usually temporary and happens when supply doesn’t meet demand (such as when there was a toilet paper shortage in 2020). If not dealt with, transitory inflation can turn into persistent inflation,[2] which typically results in prices staying high because supply never really catches up with demand.

No matter how you slice it, inflation can be a real threat to your retirement savings. Here are the top three areas of retirement it affects the most.

Cash Holdings Erosion with Inflation

Holding on to cash causes you to lose purchasing power with inflation—no matter if you’re keeping your money stuffed in your mattress or saving it at a bank.

Now, you may be thinking, “But I earn interest on the money I keep at my bank. Doesn’t that count for something?” Yes, it does help a little. But considering the average savings account interest rate is 0.04%[3] and the average rate of inflation is 2%,[4] your purchasing power is still going down every year.

Even if you open a high-yield savings account earning 1% a year, your money is still eroding over time, albeit at a slower rate. That’s why investing is so important. It’s one of the only ways to build long-term wealth that outpaces inflation.

That said, it’s important to note that cash does have its place in your financial picture. It can serve as an emergency fund, give you a temporary spot to store money you’ll use in the short term, and can even serve as an income source in retirement when your portfolio is down. We’re not saying you shouldn’t have cash, we’re just saying it likely won’t keep up with inflation.

Household Expenses and Purchasing Power with Inflation

Inflation also erodes your purchasing power over time. Even if you vow to only buy the same items for the rest of your life, you’ll slowly need more money to buy those items as time goes on.

Here’s an example illustrating the point. 

Let’s say your current household expenses are $5,000 a month. In 20 years, you’ll likely need around $7,400 to cover those same expenses, assuming a 2% annual inflation rate. In 30 years, you’ll need around $9,000.

As you plan for expenses in retirement, don’t forget about inflation. The price of goods and services will rise. Not only do you need to save enough to cover today’s expenses, but you also need enough to cover your future, inflated expenses.

Your Portfolio of Stocks & Fixed Income Investments and Inflation

Just as the other items on our list, inflation can also chip away at your portfolio. Here’s how it affects your fixed income investments and your stock investments.[5]

  • Fixed income investments. Bonds, treasuries, and CDs provide a stable income stream, but the purchasing power of your interest payments begin to decline as inflation rises. (This is similar to what happens with your cash holdings, as we addressed earlier.) While bonds can provide some stability to your income, you don’t want to solely rely on them in retirement.
  • Stock investments. The average return of the stock market has been around 10% over the past century[6]—more than enough to cover the average rate of inflation and then some. Because of this, ETFs and mutual funds made up of stock holdings give you the best chance of outpacing inflation and building long-term wealth.

As you approach retirement, you’ll want your portfolio to be conservative enough to protect your wealth as you begin living off it, but aggressive enough to protect you from inflation. Striking this delicate balance is often something best achieved with the help of an experienced and trusted financial advisor.

How We Help

There are so many variables to account for in retirement, inflation being at the top of the list. Have you implemented any strategies into your retirement plan for how you’ll combat inflation in retirement? If not, now is the time to get started. At Washington Wealth Advisors, we’d love to help you feel more confident in your future—whether you need help creating a retirement plan, managing your investments, or setting new goals. To get started, call our office at 703.584.2700 or email  You may access our calendar online and book some time to meet.




Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our unbiased advice, independent approach, and proactive investment management help to support our clients’ overall financial peace of mind.