This week, I’m talking about why inflation matters in retirement. 

Today, I’m talking about inflation 101 - what is it and why it matters. 

Inflation, measured by the Consumer Price Index or CPI, is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Inflation is very low right now - with the CPI only increasing about 1-1.5% over the last 12 months according to the Bureau of Labor.

Low inflation is ideal in retirement, because your portfolio returns are better able to keep up with the price increases of groceries, gas, travel, etc., allowing you to maintain your lifestyle over a 20-30 year retirement. 

As inflation goes higher, that means every dollar to your name is now worth less and you need more and more dollars just to stay even and be able to purchase the things you were used to paying less for before. 

You can see the impact of inflation by looking at how much things used to cost compared to how much they cost today. 

In January 1988, a loaf of white bread cost approximately 59¢. In January of 2013, that same loaf of bread cost $1.42. So in the twenty-five year period, the bread increased 83¢ or 140%.

Because that happened slowly over time, you probably aren’t angry about the rising price of bread over the last 25 years, but your income and net worth would have had to also grow by 140% over that same time in order for that loaf of bread to not feel more expensive to you. 

The problem comes in when your income and your net worth doesn’t grow in lockstep with the inevitable price increases due to inflation. That’s why it’s such a massive mistake to put all of your cash in a safe, or under your mattress or bury it in the backyard. If your money isn’t growing at least at the pace of inflation, then you are losing because the value of what every dollar can buy is dropping over time. And that’s why inflation is so dangerous in retirement. Opportunities to increase your income when you’re retired are so limited that higher inflation really takes a toll. 

That’s it for today. But before you go, you probably know someone who is close to retirement and could benefit from listening to this podcast. If so, please share this podcast with them and encourage them to check it out by adding it to their flash briefing in Alexa or subscribing wherever they listen to podcasts! 

Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.

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