Though the rate of inflation has decreased over the past two years from a high of 9%, many consumers are still worried about rising prices. This is especially true for retirees, who don’t have the ability to earn more money and offset an increased cost of living.
But how much does inflation actually impact retirees? Is it better to have high inflation earlier or later in retirement? And, most importantly, what can retirees do to ensure they don’t run out of money as they face rising prices?
I will answer all of these questions and more as I explore the impact of inflation on retirees. I plan on doing this by analyzing three hypothetical scenarios: high inflation early in retirement, high inflation in the middle of retirement, and high inflation later in retirement. By understanding how inflation impacts spending over the retirement lifecycle, you will be better prepared to deal with rising costs in old age.
So, whether you’re already retired or still in the planning stages, it’s essential to consider the role inflation can play in your golden years. To that end, let’s start by looking at what high inflation actually means.
How High is “High” Inflation?
Before we analyze how inflation impacts spending in retirement, we first must choose a period of “high” inflation. Below is a chart showing the annual inflation rate in the U.S. from 1927 to April 2024:
Over this time period, the annual inflation rate in the U.S. was between 0% and 5% around 66% of the time. The other one third of the time, inflation was above 5% or below 0% (i.e. deflation). While there is no official definition of “high” inflation, I would say anything above 10% clearly qualifies. Looking at the chart above, there are only two periods that meet
