Inflation: The Slow Leak

The story: Walt’s shrinking pension

At the grocery store, Walt notices the same cart costs more each year while Walt’s pension stays the same.

1. Narrator: Walt has a pension: $1,500 a month (example). It has paid the same amount every month for years.
2. Walt: The pension never changes, but my grocery cart sure does. The same cart costs more every year.
3. Narrator: That’s inflation: rising prices. A fixed check buys a little less each year.
4. Narrator: A quick rule: divide 72 by the yearly price rise. At 3% a year (example), prices double in about 24 years.
5. Walt: My Social Security gets a raise in years when prices rise. The pension doesn’t.
6. Narrator: So Walt plans for spending to grow, and keeps some savings in things that can keep up with prices.
7. Narrator: A fixed check shrinks every year. Plan for prices to double.

What you’ll learn

1. The rule of 72

   Divide 72 by the yearly inflation rate to estimate how many years it takes prices to double. At 3% a year (example), that’s about 24 years, well within a long retirement.

2. Which income keeps up

   Social Security gets a cost-of-living raise in years when prices rise, and in some years the raise is zero. Most private pensions and many annuities pay the same amount forever, so their buying power shrinks every year.

3. Your own inflation rate

   Official inflation tracks an average basket of goods. Yours may differ. Retirees often spend more on health care, which has tended to rise faster than other prices, so your personal rate can be higher than the headline number.

4. Ways to keep up

   Over long periods, stocks have tended to grow faster than prices, with bumpy years along the way. TIPS and I bonds are government bonds that rise with inflation. Planning for spending to grow each year keeps the plan honest.

Key words

inflation

rising prices

purchasing power

what your money can buy

CPI

the government’s price index

Also called: Consumer Price Index; CPI-W sets the Social Security raise

TIPS and I bonds

government bonds that rise with inflation

Common questions

Prices jumped a lot recently. Is my plan ruined?

Not necessarily. Social Security raises help, and many plans have room to adjust. Rerun your numbers with a higher rate and see what changes. Small spending tweaks often cover the gap.

Remember this

A fixed check shrinks every year. Plan for prices to double.

Try it: Test your plan with higher inflation

1. Find the inflation rate your plan or calculator assumes.
2. Run it again with the rate one point higher.
3. Note how much more you’d need each year, and which of your income keeps up.

No account: use the public Retirement Calculator (/tools/retirement-calculator).

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• This year’s cost-of-living adjustment (COLA)

  Source: SSA.gov(opens in a new tab)

• Latest consumer price index (CPI)

  Source: BLS.gov(opens in a new tab)

• I bonds: current rate and limits

  Source: TreasuryDirect.gov(opens in a new tab)