This week, I’m talking about why inflation matters in retirement. Today, I’m covering the most important topic of the week - what are the returns you’ll need in retirement to keep up with inflation in retirement. 

If inflation is 3% a year, you’ll need to make 7% on your investments to earn 4%. That’s before taxes. If you’re in the 15% tax bracket in retirement, that cuts your real returns to only 3%. So even at a reasonable level of inflation of only 3%, you’re net returns after taxes and inflation are pretty low. 

And we haven’t even considered portfolio withdrawals you’ll be taking in retirement. So you can see how challenging it is just to break even after inflation, taxes, and portfolio withdrawals and avoid depleting your investment portfolio. 

There are 2 important takeaways from this to understand about how inflation impacts your retirement. First of all, a 7% portfolio return is quite good in retirement. I would be very happy with that over a 20-30 year time period. Many investors earn much less than this in retirement because they have a lot in bonds and cash. That’s why you must be careful to not be too conservatively invested in retirement because it can seriously come back to bite you in retirement. 

Even with this standard base case scenario, you’re still just breaking even. But what if inflation is 4 or 5%? Your real returns drop to the 1-2% range, before withdrawals, so that’s where your purchasing power goes down. Your portfolio returns can’t keep up and you either have to cut back or seriously risk running out of money in retirement. 

And that’s why inflation matters so much in retirement. Because it only takes a slightly elevated inflation to put your retirement in jeopardy. 

Tomorrow I’m going to continue on this topic and discuss how inflation can be devastating in retirement, and we’ll talk more specifically about what you can do to guard your portfolio against the ravages of inflation. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.

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