Inflation and Purchasing Power: The Silent Risk in Retirement

What is the biggest risk you face in retirement? If you said the stock market, you are not alone. Most retirees point to market volatility as the thing that keeps them up at night. A bad quarter. A correction. A bear market that arrives at the worst possible time. Those fears are real, and they are understandable.

But what if the biggest risk is not the one that makes headlines? What if it is the one that never makes a sound?

Volatility is the risk you can see. Inflation is the risk you can feel.

A market downturn is dramatic. It shows up on the news, in your quarterly statement, and in conversations at dinner parties. But inflation works differently. It does not announce itself. It does not send a notification. It simply makes everything around you a little more expensive, year after year, until the retirement you planned for costs far more than you expected. And by the time most people notice, the damage is already done.

This is not a theoretical concern. If the last few years have taught us anything, it is that inflation is not a relic of the 1970s. It is here, it is real, and it affects every family planning for or living in retirement. Between 2021 and 2023, Americans experienced the sharpest rise in consumer prices in over four decades. Grocery bills surged. Healthcare costs climbed. Energy prices spiked. And for retirees living on a fixed income, every one of those increases landed harder than it did for someone still receiving annual raises at work.

The question is not whether inflation will affect your retirement. It is whether your plan accounts for it.

What Inflation Actually Does to Your Money

Inflation is often described as the rate at which prices rise. But for a retiree, a more useful definition is this: inflation is the rate at which your money loses its ability to support your life.

Think of your retirement savings as a block of ice on a warm day. You can see the block. You can measure it. It looks solid. But the moment you set it outside, it begins to shrink. Not quickly. Not dramatically. But steadily and relentlessly. Inflation works the same way. Your account balance may look the same on paper, but its ability to buy the things you need is slowly melting away.

Consider what everyday costs looked like just 20 years ago. In 2005, a gallon of milk cost about $3.20. Today, that same gallon runs about $4.05. A movie ticket was $6.41. Today, the average is closer to $11. A first-class postage stamp cost $0.37. Today, it is $0.73, nearly double. These are not luxury items. These are the ordinary costs of living.

Now multiply that pattern across everything a retiree spends money on: groceries, utilities, property taxes, home maintenance, insurance, travel, and especially healthcare. Healthcare costs have risen more than 120% since 2000, consistently outpacing overall inflation. For retirees who spend a larger share of their income on medical care, the effective rate of inflation they experience is often significantly higher than the headline number.

Your grocery bill does not care what the CPI says. It charges you what it charges you.

And that headline number, the one you hear on the news, is itself misleading. The Consumer Price Index is an average across all consumers. It weighs housing, transportation, food, healthcare, and dozens of other categories into a single number.

But retirees do not spend like the average consumer. They spend disproportionately more on healthcare, which has been rising at 5% to 6% per year. They spend more on housing maintenance, insurance, and prescription drugs. Less on gas for a daily commute. Less on work clothing. The official inflation rate might say 3%. But the inflation a retiree actually experiences at the checkout counter, at the pharmacy, and at the doctor’s office can be 4%, 5%, or higher.

Headline inflation is a national average. Your inflation is personal. And for most retirees, it is higher than the number they see on the evening news. This gap between the reported rate and the rate you actually live with is one of the most underestimated risks in all of retirement planning.

The Raise You No Longer Get

Here is something most people never think about until it is too late: for your entire working career, you had a built-in defense against inflation. It was called a raise.

Every year or two, your salary went up. Maybe it was a cost-of-living adjustment. Maybe it was a promotion. Maybe it was a new job with a higher offer. Whatever the reason, your income was quietly rising alongside the cost of living. You may not have even noticed inflation during those years because your paycheck was keeping pace. The groceries cost more, but you were earning more. The insurance premiums went up, but so did your bonus. The escalator was carrying you upward, and you barely had to think about it.

The moment you retire, that escalator stops.

Your income becomes fixed. Your expenses do not. 

Now you are taking the stairs. Every price increase you encounter, at the grocery store, at the pharmacy, on your insurance bill, comes directly out of your purchasing power with no offsetting raise to absorb it. The inflation that was invisible during your working years suddenly becomes very visible, because there is no longer an automatic mechanism to counteract it.

This is one of the most jarring transitions in retirement, and one of the least discussed. People plan for the loss of a paycheck. They plan for the shift from saving to spending. But very few plan for the loss of the annual raise that was silently protecting them from inflation their entire adult lives.

Think of it like running on a moving sidewalk at the airport. You feel like you are keeping a comfortable pace, but the belt beneath your feet is doing half the work. The moment you step off that belt and onto the regular floor, you realize how much effort it actually takes to maintain the same speed. Retirement is the moment you step off the belt. Inflation is the distance you now have to cover on your own.

You do not feel inflation when your income is rising. You feel every bit of it when your income stops.

The 20-Year and 30-Year Reality: What Retirement Actually Costs

Here is where the math becomes personal.

Meet Richard and Diane. Both are 65 and just retired. Their annual living expenses are $100,000. They feel comfortable. Their savings are solid. Their Social Security is in place. They believe they have enough.

But have Richard and Diane considered what their life costs at 85? What about at 95?

At an average inflation rate of just 3% per year, which is close to the long-term historical average, here is what happens to their purchasing power:

*Assumes 3% average annual inflation. Figures are approximate and for illustrative purposes only.

Read that last row again. If Richard and Diane live to 95, their $100,000 lifestyle will cost nearly $243,000 per year just to maintain the same standard of living. And if they did nothing to grow their savings, the purchasing power of every dollar they set aside would be worth less than 42 cents.

Their account balance did not shrink. Their life just got more expensive around it.

And this assumes a 3% rate. Healthcare inflation has historically averaged closer to 5% to 6%. For retirees whose medical costs represent a growing share of their budget with each passing year, the erosion is even steeper.

This is not a hypothetical exercise. People are living longer. A healthy 65-year-old couple today has a reasonable probability that at least one of them will live past 90. A 30-year retirement is no longer an outlier. It is a planning reality. And that means inflation is not a short-term nuisance. It is a structural force that your portfolio must be designed to outpace.

The Social Security “Raise” That Doesn’t Keep Up

At this point, many retirees will say, “But my Social Security is adjusted for inflation. I get a cost-of-living increase every year.”

That is true. Social Security provides an annual cost-of-living adjustment, known as the COLA. And on the surface, it sounds like the perfect protection. Prices go up, your benefit goes up. Problem solved.

Except the COLA is not calibrated to your life.

The Social Security COLA is based on a measure called the CPI-W, which tracks inflation for urban wage earners and clerical workers. Not retirees. Wage earners. That index reflects the spending patterns of someone still working: commuting costs, work clothing, lunches out, childcare. It underweights the categories that dominate a retiree’s budget, particularly healthcare, prescription drugs, supplemental insurance, and long-term care.

So what does this mean in practice? In a year where the COLA gives you a 2.8% increase, your actual cost of living may have risen 4% or 5% because your healthcare premiums climbed, your prescription costs increased, and your Medicare Part B went up more than the general index. You received a raise. It just was not big enough.

Every year the COLA falls short, the gap compounds. And it never catches up.

Think of it like a roof with a slow leak. Each year, a little more water gets in. In year one, you barely notice. By year five, there is a stain on the ceiling. By year fifteen, the damage is structural. The COLA is patching the roof every January, but it is using a patch that is slightly too small. Over a 20- or 30-year retirement, the cumulative shortfall between what your COLA covers and what your life actually costs can amount to tens of thousands of dollars in lost purchasing power.

This is not a flaw in Social Security. The program does what it was designed to do. But it was never designed to be your sole defense against inflation. It was designed to be a floor, not a ceiling. The rest of the protection has to come from your investment portfolio, your withdrawal strategy, and the planning that ties them together.

If your plan assumes the COLA fully protects you from inflation, your plan has a gap. And that gap gets wider every year you are in retirement.

The Conservation Trap: Why Playing It Safe Can Be the Riskiest Move

Here is where the well-meaning instinct of most retirees can actually work against them.

Meet Carol. Carol just retired at 65 with $1.2 million in savings. She worked hard for that money. She watched it grow over decades. And now that she has crossed the finish line into retirement, her first instinct is to preserve it. She tells her advisor, “I don’t want to lose what I’ve built. Let’s move everything into something safe.”

It is a natural reaction. After a career of accumulating, the shift to spending feels vulnerable. The idea of a market decline wiping out years of savings is terrifying. So, Carol moves heavily into bonds, CDs, and money market funds. She feels confident.

But is Carol’s money actually less vulnerable?

If Carol’s “less vulnerable” portfolio earns 3% to 4% per year, and inflation averages 3%, her real return, the growth that actually matters, is close to zero. She is running on a treadmill. Her balance may hold steady, but its ability to fund her life is declining every single year. In 20 years, her $1.2 million buys what $660,000 buys today. In 30 years, it buys what $490,000 buys today.

Preservation of principal is not the same thing as preservation of purchasing power.

This is the distinction that changes everything. The goal of retirement investing is not to keep your account balance from going down. The goal is to make sure your money can still support your life five, ten, twenty, and thirty years from now. A portfolio that never declines but never grows in real terms is not less vulnerable. It is slowly failing.

Think of it this way. If you put food in the freezer to preserve it, the food looks the same. The weight is the same. The packaging is intact. But if the freezer is slowly losing power, the food is spoiling from the inside out. By the time you open it years later, what looked preserved is no longer usable. That is what inflation does to a portfolio that is not built to grow.

The real risk in retirement is not a bad quarter in the stock market. It is a quiet decade of falling behind.

The Tax Toll: Why Your Returns Are Smaller Than You Think

If the inflation conversation stopped here, it would be concerning enough. But there is another force working against your purchasing power that makes the math even more difficult: taxes.

When you hear that a conservative portfolio returned 4% to 5% last year, that number is pre-tax. But inflation does not charge you pre-tax prices. Every gallon of milk, every doctor’s visit, every utility bill, every property tax payment is made with after-tax dollars. The cost of living is an after-tax reality. And that mismatch is where many retirees quietly fall behind.

Let us walk through the math. Suppose your portfolio earns 5% in a given year. Depending on the type of account and the nature of the income, whether it is ordinary income from bonds or a traditional IRA distribution, or capital gains from a taxable brokerage account, you may owe 15% to 30% or more in federal and state taxes on those gains. At a 25% effective tax rate, your 5% return becomes 3.75% after taxes. Now subtract inflation at 3%. Your real, after-tax return is 0.75%.

Less than one percent. That is what you actually kept.

And remember, that 3% inflation figure is the headline number. If your personal inflation rate is closer to 4% or 5% because of healthcare costs, your real after-tax return may be zero. Or negative. You earned a positive return on your statement, paid taxes on it, and still lost ground to the cost of living.

Think of it like a tollway. Your investment returns are driving toward your wallet. But before they arrive, they have to pass through a tax tollbooth. A portion of every dollar is collected before it ever reaches you. Meanwhile, inflation is raising the prices at your destination at the full rate, no tollbooth, no discount, no deduction. The prices you pay at the grocery store, the pharmacy, and the gas station are not reduced because you paid taxes on your investment gains. Inflation charges full fare on the other side of the toll.

Your returns are taxed. Inflation is not. That asymmetry is one of the most overlooked realities in retirement planning. It means that a portfolio earning 4% to 5% before taxes, which sounds reasonable, may only deliver 2% to 3.5% after taxes. And when you subtract real-world inflation at 3% to 5%, you are left with a razor-thin margin, or worse, you are going backward.

This is precisely why keeping up with inflation requires more than a conservative portfolio.

You need the type of growth that equities provide, and you need a strategy that manages your tax exposure along the way. Roth conversions, tax-efficient withdrawal sequencing, asset location across taxable, tax-deferred, and tax-free accounts: these are not optional add-ons. They are essential tools for making sure more of your return actually reaches your purchasing power.

It is not what your portfolio earns that matters. It is what you get to keep after taxes, after inflation, after life.

Why Equities Still Matter After You Retire

If inflation is the disease, then equities are the long-term medicine.

Historically, stocks have been the only asset class that has consistently outpaced inflation over extended periods. Bonds provide balance. Cash provides liquidity. But neither has the growth engine necessary to keep your purchasing power intact over a 20- or 30-year retirement.

This does not mean a retiree should have 100% of their portfolio in stocks. It means that having too little in equities may actually be more dangerous than having too much, especially when the retirement could last three decades.

Here is the tension most retirees face: they understand, at least intellectually, that they need growth. But when the market drops 15% or 20%, the emotional response is overwhelming. They want to sell. They want to move to cash. They want to make the pain stop. And if their advisor has not built a strategy to manage that emotional reality, the client often makes the worst possible decision at the worst possible time.

You cannot outrun inflation from the sideline. You have to stay in the game.

So how do you stay invested in equities, which you need for long-term growth, while also preserving your assets from the short-term volatility that makes equities so difficult to hold? How do you keep your foot on the gas and still feel confident?

At Gatewood Wealth Solutions, this is exactly the problem our cash strategy was designed to solve.

Bear Market Ready, Bull Market Positioned: How Our Cash Strategy Works

Most advisors and institutions approach retirement investing with a simple formula: as you get older, shift more of your portfolio into bonds and cash. The thinking is simple. Less volatility equals less risk. And for many firms, the standard recommendation is something like a 60/40 or even 50/50 stock-to-bond allocation by the time you reach retirement.

But we believe this conventional approach misidentifies the risk. It focuses on reducing volatility when the real enemy is inflation. The result? Portfolios that feel comfortable but do not grow fast enough to keep up with the rising cost of life.

At Gatewood, we take a different approach. We call it being “Bear Market Ready, but Bull Market Positioned.” The foundation of this strategy is our Cash Target.

Here is how it works. Rather than shifting large portions of a retiree’s portfolio into bonds simply because they have reached a certain age, we calculate a precise amount of cash that each client should hold in a dedicated cash reserve. This Cash Target is based on the client’s actual monthly expenses, their income sources like Social Security and pensions, and our Investment Committee’s current assessment of market conditions.

The purpose of this cash reserve is simple but powerful: it provides the income a client needs to live on for a defined period of time, regardless of what the stock market is doing. If the market enters a downturn, we draw from the cash reserve rather than selling investments at depressed prices. This gives the invested portion of the portfolio time to recover without being raided during a decline.

Cash buys you time. Time allows your investments to recover. Recovery preserves your purchasing power. 

Think of it like a water tower for a community. On a normal day, water flows from the main supply and the tower stays full. But when the main supply is interrupted, whether by a storm or a maintenance issue, the water tower provides steady, reliable service until the supply comes back online. No one panics. No one goes without water. The reserve does its job, and life continues normally.

That is exactly what the cash reserve does for our clients. It is their water tower. When the market is strong, we replenish it. When the market declines, we draw from it. And because our clients know they have this buffer, they have the confidence to remain invested in equities at higher levels than they might otherwise tolerate.

This is the key insight: the cash strategy is not about the cash itself. It is about what the cash allows you to keep invested. By separating the money that you need in the short term from the money that needs to grow over the long term, we give clients the confidence they need emotionally and the growth they need financially.

How This Strategy Preserves Purchasing Power Over Decades

Let us return to Carol, the retiree who wanted to “play it safe.” What would her retirement look like under two different approaches?

Scenario A: The conventional approach. Carol moves to a conservative 40% stock, 60% bond allocation. Her portfolio grows at roughly 4% to 5% per year before taxes. After taxes and inflation, her real return is near zero, or possibly negative in years when healthcare costs spike. Over 25 years, her purchasing power slowly deteriorates. By 85, she is making difficult choices about healthcare, travel, and the lifestyle she planned for. By 90, she is drawing down principal faster than she expected. Her statement looked less vulnerable. Her life did not feel less vulnerable.

Scenario B: The Gatewood approach. Carol maintains a higher equity allocation, perhaps 65% to 75% in stocks, because she has a cash reserve covering 12 to 24 months of living expenses. Her portfolio grows at 7% to 8% over time. With tax-efficient strategies like Roth conversions, strategic withdrawal sequencing, and thoughtful asset location, more of that return actually reaches her wallet. After taxes and inflation, her real return is meaningfully positive. When the market dips, she draws from her cash reserve instead of selling stocks at a loss. When the market recovers, she replenishes the reserve. Over 25 years, her portfolio has not just survived inflation and taxes. It has outpaced them. She is living the same lifestyle at 90 that she planned at 65.

Same starting balance. Same retirement. Vastly different outcomes.

The difference is not luck. It is structure. Carol’s portfolio in Scenario B was designed to grow because the cash strategy removed the pressure to sell during downturns. She did not need to become less invested as she aged. She needed to become more intentional about how her money was organized.

Think of it like a home with a well-stocked pantry. If you know you have three months of food in the house, a winter storm does not send you into a panic. You do not rush to the store in dangerous conditions. You wait. You are prepared. And when the storm passes, you resupply calmly, on your terms. That is the emotional and financial freedom our cash strategy creates.

Inflation Is Not Just Your Problem. It Is a Family Problem.

When we talk about inflation eroding purchasing power, we are not just talking about one person’s retirement. We are talking about the ripple effects that reach across an entire family.

When a retiree’s savings cannot keep up with the cost of living, the burden often shifts.

Adult children step in to help with medical bills, home repairs, or daily expenses. Family vacations get scaled back or canceled. Inheritances that were intended to provide a head start for the next generation shrink or disappear entirely. The financial strain does not stay contained. It radiates outward.

Inflation does not just affect your retirement. It affects your family’s future.

This is why at Gatewood, we think about inflation through the lens of our Firm-to-Family™ approach. When we build a plan, we are not just asking whether your money will last until age 90. We are asking whether your plan preserves the financial independence that allows you to live on your terms, support the people you love, and leave the legacy you intended. Inflation threatens all of it. Your investment strategy must account for all of it.

What You Can Do About It

Inflation may be beyond your control, but your response to it is not. Here are the questions every retiree and pre-retiree should be asking:

Is my portfolio built to grow, or just to survive? If your investments are primarily in bonds, CDs, and money market funds, your portfolio may be falling behind inflation every year. Ask your advisor what your real return has been after accounting for inflation.

Do I have a cash strategy that allows me to stay invested? If a market downturn would force you to sell stocks to pay your bills, your portfolio is not structured properly. A dedicated cash reserve gives you the freedom to weather short-term volatility without sacrificing long-term growth potential.

Have I stress-tested my plan for a 30-year retirement? Many financial plans are modeled for 20 years. But if you are 65 and healthy, planning to age 85 may not be enough. Ask to see what your plan looks like at 90 and 95 with varying inflation assumptions.

Am I thinking about inflation as a fixed number, or as a category-by-category reality? Healthcare inflation runs significantly higher than general inflation. If medical costs are a growing part of your budget, your effective inflation rate may be 4% or 5%, not the 2.5% to 3% headline number.

Is my advisor managing for preservation of principal, or preservation of purchasing power? There is a significant difference. One preserves the number on your statement. The other preserves the life that number is supposed to fund.

Ask the right question, and the right strategy follows.

Wealth Is Personal. So Is Inflation.

At Gatewood Wealth Solutions, we believe that wealth is personal. Your retirement is not a spreadsheet exercise. It is your life, your family’s security, and your ability to do the things that matter most to you for as long as you live. Inflation is the force that quietly threatens all of it.

That is why we do not build portfolios designed to avoid discomfort. We build portfolios designed to sustain purchasing power. Our cash strategy gives clients the confidence to remain invested in equities at levels that can outpace inflation, while the cash reserve provides the confidence to ride through the inevitable downturns along the way.

The true value of planning is the confidence it creates. When you understand how inflation affects your plan, when you have a strategy that accounts for it, and when you know that your cash reserve is there to keep you from selling and manage your lifestyle during the difficult stretches, you do not need to fear the market. You do not need to hide from it. You can participate in the growth potential that keeps your purchasing power intact for decades.

If you want to see what inflation is doing to your specific plan, or if you want to understand how our cash strategy could change the trajectory of your retirement, we would welcome that conversation. Reach out to us at Gatewood Wealth Solutions. We keep your priorities the priority, and purchasing power is always one of them.

Protect what your money can do, not just what it says on the statement.

Important Disclosures

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Gatewood Wealth Solutions and LPL Financial do not provide legal or tax advice or services.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Stock investing includes risks, including fluctuating prices and loss of principal.​

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA

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