Inflation's effect on retirement savings

The amount you spend on necessities today could double or triple by the time you retire. As you plan for retirement, it's important to keep in mind on the consequences of inflation and how it can affect your saving and buying power.

What is inflation?

Inflation is the rise in average prices for goods and services in the general economy. In recent years, U.S. inflation has hovered in the range of 1% to 2%,1 but it hasn't always been so low. During the "Great Inflation" of the 1970s, it reached its 20th century peak, exceeding 10%.

Inflation looks dramatic over time

When considered year to year, inflation may not seem dramatic. But take a look at how the price of a new car has inflated over the past 50 years.

Price of a new Car2

1960

$2,600

1980

$7,200

1990

$16,950

2013

$31,352


Consider rising prices after retirement

One thing you can do today is start saving more. Log in to your retirement account to increase your contributions. Let's say you're 40 and plan to retire when you're 65. If you lived until 90, you'd need to keep up with rising prices for the next 50 years. And, for 25 of those years, you'd likely be living off of your retirement income. 

If inflation stays near just 2%, the new car that cost you about $31,000 in 2013 would cost almost $50,000 in 25 years. How can you plan to keep up with this cost-of-living jump when saving for retirement today?

Investing in stocks can help offset inflation

Investing some of your assets in the stock market may help you keep up with inflation. That’s because stocks have the potential to outperform the inflation rate. Meanwhile, Social Security payments already adjust to reflect rises in the cost of living. You may want to talk with a financial professional who can help you look at the whole picture.

1”Historical Inflation Rates: 1914-2015,” U.S. Inflation Calculator, February 2015 .
2The People History, ”Comparison of Prices Over 70 Years,” www.thepeoplehistory.com/70yearsofpricechange.html, April 2015 .