Inflation is the rate at which the prices of goods increase on an annual basis. It can also be called your purchasing power. The risk is that your investment returns will not keep up with an increase in living expenses. Over time, your effective income decreases, making it difficult to support the lifestyle you're accustomed to.
In addition, many of the goods and services most often used by retirees are already experiencing greater-than-average price inflation. Healthcare costs, for instance, can be particularly onerous. Healthcare expenses are expected to continue their historical trend of inflating at 2-2.5 times the U.S. inflation rate. According to a 2021 study conducted by Healthview Services, the average 65-year-old couple retiring in 2021, will spend $662,156 on their healthcare costs throughout retirement.
You may think that 7% inflation rate in the 1970s was terrible, and that 2% or 3% annually since 1990 isn’t so bad. Well, the total cumulative inflation rate for the 32-year period from January 1990 through January 2022 was 120.68%. Something that cost $100 in January 1990, cost $220.68 in January 2022. In other words, that price more than doubled and purchasing power was cut more than in half.
At a minimum, your retirement should try to keep pace with inflation just to maintain your lifestyle.