One reason people tend to underestimate their retirement saving needs is that they fail to properly account for the impact of inflation. Even in the current era of relatively mild inflation, the steady accumulation of price increases over a period of years can still have a profound effect on how much money you will need in retirement.

Time is what gives inflation its power. In setting retirement targets, you not only have to account for the compounding effect of price increases between now and when you retire, but also for the continued impact of inflation over the years you spend in retirement. For a 40-year-old, this means having to think of both a 25-year (from the present to retirement age) and a 50-year (remaining lifespan) time horizon.

Here is how various inflation environments could affect your retirement plans.

Normal inflation

Over the past 50 years, the Consumer Price Index has increased at an average annual rate of 4.15 percent. That may sound reasonably innocuous, but at this rate you could expect prices to increase by 176 percent over the next 25 years. That means for every $100,000 you would need for retirement today, you would need $276,000 in 25 years to have the same purchasing power.

That same 4.15 percent inflation rate would amount to 663 percent over the next 50 years, meaning that it would take $763,000 at that point to have the same purchasing power that $100,000 has today.

High inflation

Even normal inflation can add up to some daunting price increases over time, but the numbers can be staggering during periods of high inflation. During the 1970s, prices rose by an average of 7.9 percent a year. If that rate of inflation continued for 25 years, it would represent a total price increase of 494 percent, requiring you to have $594,000 for every $100,000 you would need at today's prices.

Over 50 years, that 7.9 percent rate of inflation would represent a total price increase of 3,433 percent, in which case you would need more than $3.5 million just to have the same purchasing power that $100,000 has today.


It is rare, but prices do sometimes go down. This is what is known as deflation, and while you might like the idea of falling prices as a consumer, deflation tends to be a symptom of a chronically weak economy. In that environment, you are likely to have trouble earning the investment growth you need to reach your retirement targets.

Today's inflation

Over the past five calendar years, inflation has been unusually low at an average annual rate of just 2.10 percent. Continued inflation at that rate would amount to a total increase of just 68 percent over 25 years, and 183 percent over 50 years. Still, even with low inflation, you would need $283,000 in 50 years to replicate the purchasing power of $100,000 today.

Despite low inflation, keeping pace is especially challenging these days because of low bank rates. Bank rates normally adjust to a level just above inflation, but they have lagged behind price increases in recent years. This has driven investors more heavily into the stock market, but the risk there is that a bear market could put you behind inflation for years to come.

Related Articles
  1. Retirement

    Retirement Tips for Doctors

    Learn five tips that can help physicians get back on schedule in terms of making financial preparations they need to retire.
  2. Mutual Funds & ETFs

    Top Schwab Funds for Retirement

    These Schwab funds are strategically designed and have performed well on a historical basis, meaning they're solid options for retirement.
  3. Retirement

    Retirement Plan Solutions For 70+ Workers

    If you’re still working in your 70s, you’re probably trying to seal a crack in your nest egg, or you just don’t want to retire.
  4. Retirement

    4 Ways to Boost the Amount You Save for Retirement

    Retirement can easily last more than twenty years, which means you have to save a lot. Thankfully, there are ways to enhance the amount you put away.
  5. Retirement

    How to Fix an Error on Your Social Security Check

    For many seniors, social security benefits checks are their income stream which means the benefit has to be correct. If you spot an error, you can fix it.
  6. Retirement

    Why The 4% Rule No Longer Works For Retirees

    The 4% rule basically states that retirees can withdraw that much from their portfolio each year without depleting the principal too early.
  7. Retirement

    Is $200,000 Enough to Retire in the Bahamas?

    As paradise goes, the Bahamas are not cheap, but these gorgeous islands may be a more affordable retirement destination than you expect.
  8. Retirement

    Find the Right Bahamas Island for Your Retirement

    There may be no “best” Bahamas island, but there may be a best island for your retirement. Here are some top spots to consider.
  9. Retirement

    What Happens to a 401(k) After You Leave Your Job?

    Find out what happens to your 401(k) after you leave your job. Learn about your five primary options, including cashing out and rolling over to a new plan.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Mutual Funds for Retirement

    Discover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
  1. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  2. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  3. Who offers 401(k) plans?

    401(k) plans are one of the most common retirement plans available. A 401(k) plan must be offered by a business. These plans ... Read Full Answer >>
  4. Are catch-up contributions tax deductible?

    Catch-up contributions for most qualified retirement plans such as 401(k)s, 403(b)s and individual retirement accounts (IRAs) ... Read Full Answer >>
  5. Can catch-up contributions be made to a SEP?

    In general, you cannot make catch-up contributions to an IRA held in a simplified employee pension (SEP) plan, because SEPs ... Read Full Answer >>
  6. Can you make tax-free withdrawals from your 401(k)?

    Depending on what type of 401(k) account you have and your age, you may be able to withdraw funds tax-free. However, if you ... Read Full Answer >>

You May Also Like

Trading Center