SHORT-TERM MARKET declines get all the attention. But long-run inflation can prove far more threatening to retirees. We saw a sharp increase in inflation in recent years, with prices rising 7.2% in 2021 and 6.4% in 2022, before slowing to 3.4% in 2023. If those sorts of price increases persisted, it would cause major financial headaches.

Consider the damage that even modest inflation can inflict. Over the 10 years through year-end 2023, consumer prices—as measured by CPI-U, the most popular inflation measure—climbed at 2.8% a year, according to the Bureau of Labor Statistics. Suppose annual inflation continued to run at 2.8% during a retirement that lasted 30 years. By the end of three decades, the purchasing power of $1 would be reduced to 44 cents.

Moreover, CPI-U may underestimate how much seniors are affected by rising prices. The Bureau of Labor Statistics has a separate measure, known as CPI-E, which is designed to gauge inflation as experienced by households with folks age 62 and up. CPI-E assigns greater weight to housing and medical care. Both items tend to eat up more of the income of older Americans. Data for CPI-E go back to December 1982. The first two decades of CPI-E data show it running 0.4 percentage points a year faster than CPI-W, the index to which Social Security payments are pegged. But in the most recent two decades, through late 2021, there’s been almost no difference in the two indexes—good news for retirees.

Even if retirees can generate an income stream that rises with inflation, they will likely find themselves lagging behind their neighbors who are still in the workforce. Why? The standard of living rises not with inflation, but with per capita GDP, which in the U.S. has grown 1.7 percentage points a year faster than inflation over the 50 years through year-end 2023.

The implication: Even as you strive to generate current income, you need to prepare for higher prices down the road. That might mean looking for income streams that are indexed to inflation, seeking capital gains by investing perhaps half of your portfolio in stocks, and possibly setting aside a portion of each year’s investment income to spend in future years.

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