"What good is a million dollar portfolio if living expenses inflate to $10,000 a month?"
After you spent a lifetime building a nest egg as retirement approaches you may decide to put that money in something "safe" like bonds, money market accounts, annuities or CDs.
Your portfolio may seem fine for a few years and it even looks like you're getting good returns, but that whole time - Inflation is eating it alive.
The problem is that those safe investments can do serious damage to your portfolio without you knowing.
Even a moderate inflation rate — like 4% — can seriously disrupt a financial plan.
To put 4% inflation in context, here's what the average inflation rate has looked like over the past 60 years in America.
Inflation was incredibly volatile in the 70s and 80s. A lot of that had to do with leaving the gold standard and the oil uncertainty of that era. During that period a lot of retirement plans that looked solid on paper fell apart in practice.
When you look at that chart, other than the spike we saw during COVID, inflation levels have been relatively modest over the broader sweep of time. What we know, is that even at a "modest" rate, inflation compounds. Especially the longer the retirement period lasts.
This is really where the concept of longevity risk comes in. It boils down to one thing: outliving your money. And inflation is the biggest reason that happens.
With lifespans regularly reaching into the 80s and beyond, you can easily be looking at a 20-year retirement. At 4% inflation over 20 years, prices rise by over double — (219% increase in costs). Another perspective on this is that the dollar you saved in 2005 only buys about half of what it did then.
The good news is that you can invest some of this risk away by using equities. Stocks tend to outperform the general inflation rate by a wide margin over long periods of time.
The bad news is that retirees and people investing on their own often have too much of their money in fixed-income investments like bonds, annuities or pensions.
Bonds almost never outpace inflation. After taxes, you're usually looking at a negative real return, which means you're actually losing ground by holding them. So then the total return doesn’t matter, what does is the inflation adjusted return, or the real return.
Real return is simple — it's just your return percentage minus the inflation rate.
Say inflation for the year was 4%. If your portfolio is in high-growth stocks and it returned 9%, then your real return was 5%. You're building wealth. But if your portfolio was mostly in bonds and returned 5%, your real return before taxes was only 1%. And after taxes? You're probably looking at a negative number.
Bonds absolutely have a place in a financial plan. I'm not saying get rid of them - But smart allocation is everything.
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Schedule A Free CallFor people who are already retired, the risk gets even more specific. If you're living on fixed income sources — pensions, bonds, annuities without inflation riders — then you're receiving the same number of dollars every month while the cost of everything around you keeps going up.
At 4% inflation, it's manageable but real. If inflation were to double like it did a few years ago during COVID, that's a genuinely dangerous situation for someone on a fixed income. You'd have to start drawing down your portfolio more and more each year just to cover the same expenses you were handling comfortably a decade ago.
So what can you actually do about it?
The answer, ultimately, is balance. You need to balance your safe investments with enough equity exposure to generate real returns that actually outpace inflation. And you need to track your real return — not just the headline number, but what you're actually earning relative to the environment you're in. Because what good is a $1,000,000 portfolio when your monthly expenses have inflated to $10,000 a month?
It's possible to be too safe and too careful. As we age and get closer to retirement, the natural instinct is to preserve what we've built rather than keep growing it. That makes sense emotionally. But if you overcorrect into bonds and fixed income, you can quietly lose purchasing power on a daily basis without ever seeing a single red number on your statement. That's what makes inflation the silent killer.
Thanks for reading.
FAQ
What is inflation and why does it matter for retirement?
Inflation is the rate at which prices for goods and services rise over time, reducing the purchasing power of your money. In retirement, when you're living on a fixed income or drawing from savings, even a moderate inflation rate can erode your lifestyle significantly over 20+ years.
What is a "real return" and how do I calculate it?
Real return is the return on an investment after inflation. Take the total return % of the investment and subtract the % of inflation
Are bonds bad investments in retirement?
It depends. Generally they increase diversification, however too much or too little bonds in a portfolio can either stall growth or increase volatility. Speak with a financial advisor
What is longevity risk?
The risk of outliving your money. The main driver of this is inflation, however medical expenses and prolonged living costs and other expenses can impact this.
How much equity exposure should a retiree have?
It depends. Typically you would decrease equity holdings as you age, however doing it too much or too fast can limit growth required for your money to last the length of your retirement. Speak with your financial advisor.
What is an inflation rider on an annuity?
This is an agreement to increase the amount of the annuity payment to match inflation. This can be good to reduce the risk of losing purchasing power.
How did inflation in the 1970s and 80s affect retirees?
That era in the US economy was volatile and marked with high inflation and deflation - both are not good for the economy. Many retirees were forced to continue working
What's a safe withdrawal rate in a high inflation environment?
It depends. The typical rule is to not withdraw more than 4% your first year of retirement, then increase that 4% annually with inflation. This is generally accepted to produce consistently good results with retirees to not run out of money.
U.S. Bureau of Labor Statistics CPI data: https://www.bls.gov/cpi/
If you have any questions head to HamiltonFinancialPlanning.com to find out more and schedule a free call with our fee only CFP fiduciary advisors who specialize in building financial plans and investment management for clients nearing retirement in Austin and Houston TX.
Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.