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It’s not hard to find articles about high prices, the burden inflation puts on seniors, those with a so-called fixed income, which is a myth. Virtually no retiree is on a fixed income and the more they depend on Social Security the less so.
Of course, high inflation, actually any inflation creates financial stress for many retirees, but is it a surprise? Isn’t being aware of and planning for inflation a key part of retirement? Inflation is nearly always with us.
The highest period of inflation since 1900 was between 1973-1982 where it average 8.7% and hit a peak of 13.5% in 1980. That’s when my mortgage had a 9-3/4% interest rate They were tough times. Remember WIN buttons?
To my surprise the lowest period was 1920-1929 with an average of 0.0%. No wonder it’s called the roaring twenties.
While we can’t predict inflation from year to year, it’s a pretty good bet that goods and services, property taxes, etc. will cost more ten years after we retire.
Many claim Social Security doesn’t keep up with inflation. It does, but it depends.
The overall inflation rate for 2025 was reported as 2.6%. The 2026 Social security COLA was 2.8% so yes, SS keeps up with inflation. If inflation takes off after September of a year, the COLA may be less. On the other hand, the opposite may happen.
The important variables are what percentage of total income is Social Security and how close to the CPI is an individual’s inflation rate?
For example, I’m not affected by housing prices, but I am by premiums for Medicare. Indirectly many seniors see rising expenses reflected in property taxes as towns cope with rising prices and wage pressures.
The CPI-E (Consumer Price Index for Americans 62 Years of Age and Older) has been suggested as a better measure. It is an “experimental” index designed to track the cost of living specifically for seniors.
It differs from the standard CPI-W (used for Social Security COLAs) by giving more weight to the categories where you likely spend more of your budget: healthcare and housing.
Historically, the CPI-E rises about 0.2% faster annually than the CPI-W. This is because medical costs and home heating/shelter—which are weighted more heavily in the CPI-E—tend to outpace general inflation. However, that’s not always true, in some years the CPI-E has been lower.
Using the CPI-E creates another problem. It accelerates the insolvency of the Social Security trust.
Inflation is real, but erratic. It affects people, especially seniors in different ways – but is is no secret. The 4% “rule” accounts for inflation, most government pensions have COLAs too.
People thinking about retirement need a plan. My plan included retiring with excess income to start ( the infamous 100% pay replacement) plus a portion of investments outside my 401k designed to provide a supplemental income stream (dividends and interest), currently reinvested, but to be used when necessary.
What is your plan?
Our equity allocation is such that it should keep pace with inflation, and some of our bond allocation is also designed to protect purchasing power through inflation. Social security once we take it should also.
We were lucky enough in life to be able to build a liability matching portfolio for our essential expenses using a TIPS ladder combined with other reliable income sources like Social Security.
My wife and I are both collecting Social Security and enhance that with tax free munis in our taxable account and TIPs and senior loan funds in our traditional IRAs. The rest is in equity ETFs, mostly in the taxable accounts and Roth IRAs. Asset location is critical to managing taxes.
Can’t say I have a conscious plan specifically to address inflation, which is an unknown variable going forward. My pension has no COLA so if inflation takes off it will quickly lose its position as the cornerstone of my cash flow structure. The investment portfolio would need to do heavier lifting. I’m also planning on maintaining my “human capital” to a degree.
The combination of SS, which covers pretty much all of our expenses, a burn rate around 1%, along with both Chris and I being in our 70s, and investments that will (hopefully) provide real inflation adjusted growth, should get us through.
Some unknowns that could hit us in the face are Long Term Care, and possible cuts to SS.
I wish our net SS covered our expenses. Property taxes alone consume half.
I estimated that our personal inflation rate ran a bit higher than the COLA adjustments to our SSA payments in recent years. To mitigate the effects of inflation, we maximized our SSA benefits, invested our bonds into a 50:50 mix of individual TIPS and regular Treasurys maturing within 5 years or less, and hold about 50% of our portfolio in stocks. We do not own gold or commodities, and our real estate investment is our paid for home. I prefer stocks over the long run to deal with inflation, and we may increase our allocation during the next major correction.
For portfolio survival, we use a modified version of the “4% Rule”, starting with 3%, to provide a margin of safety.
My “plan” is that portfolio growth and social security COLA will keep up with inflation. Research also shows that real spending may also decline with age (the retirement spending smile). We have only been retired a short time so we shall see, but I am interested in others lived experience. Ken