Inflation’s impact on your retirement: 3 things to consider

As of March 6, 2023

U.S. households are currently facing the highest surge in inflation since the early 1980s. When it comes to day-to-day expenses such as groceries and utilities, the impact of rising prices is obvious and immediate. But what may not be as apparent is the effect that inflation has on your long-term financial goals, like retirement.

As you seek to make sense about how inflation can impact your retirement, here are three things to consider.

1. Understand the “real” effect of inflation on your long-term goals 

The recent acceleration in prices has pushed inflation to the forefront of many investors’ minds. But it’s important to remember that, even when inflation is at 1–2%, it can have a significant effect on your retirement portfolio. Consider the tables below, which examine the effects of inflation from two perspectives:

Future purchasing power of $1 million today based on an inflation rate of: 
  1.0% 1.5% 2.0% 2.5% 3.0%
15 years $861,349 $799,852 $743,015 $690,466 $641,862
20 years $819,544 $742,470 $672,971 $610,271 $553,676
25 years $779,768 $689,206 $609,531 $539,391 $477,606
30 years $741,923 $639,762 $552,071 $476,743 $411,987


How much would it take in the future to equate to $1 million today based on an inflation rate of:
  1.0% 1.5% 2.0% 2.5% 3.0%
15 years $1,160,969 $1,250,232 $1,345,868 $1,448,298 $1,557,967
20 years $1,220,190 $1,346,855 $1,485,947 $1,638,616 $1,806,111
25 years $1,282,432 $1,450,945 $1,640,606 $1,853,944 $2,093,778
30 years $1,347,849 $1,563,080 $1,811,362 $2,097,568 $2,427,262

Simply, if inflation averages 2% over 30 years:

  • Your million-dollar portfolio gives you a lifestyle that is little more than half of what it does today (top table).
  • You would need a portfolio of just over $1.8 million dollars to live the same lifestyle as you do today with your million-dollar portfolio (bottom table).

Long-term inflation numbers are typically more stable and less noticed; however, the effect can be substantial over time, particularly for those whose income doesn’t adjust.

 2. Avoid sidelining assets

In an effort to slow the economy and tame inflation, the U.S. Federal Reserve has ratcheted up its benchmark Fed Funds rate. As a result, we’ve seen an increase in interest rates for fixed-income investments, more volatility in the stock market, moves higher in commodities, gold and other “safe haven assets,” and more investors moving to the sidelines until markets normalize. While these past two years have been unusual, we believe short-term inflation may settle, and the economy may get back on trend over the next several quarters. Further, stocks tend to move higher ahead of economic recovery. In times of uncertainty, it may be tempting to remove yourself from the market but staying invested — at a level that reflects your tolerance for risk — is important in our view. History shows the markets have bounced back after losing value, and it's likely for this to happen again should major dips occur in the future. As the chart below shows, missing even a handful of days can have a long-term impact on your savings.

Source: Bloomberg, Standard and Poor’s, American Enterprise Investment Services, Inc.1

3. If you’re far away from retirement, consider stocks as a long-term hedge

Stocks have a mixed track record when it comes to inflation. Over the short term, a sudden spike in inflation can have a negative impact on stocks, as investors may anticipate that higher inflation will lead to higher interest rates and reduced consumer spending. Further, corporate profits and margins may deteriorate if they can’t pass along rising prices.

Over the long run, however, stocks can be seen as a potential hedge against inflation. Since 1871 stocks have historically outperformed inflation and have done so more consistently than other asset classes.

Companies are typically able to increase their prices and pass on the costs of inflation to consumers during times of economic growth, which can lead to higher earnings and, in turn, the potential for higher stock prices and dividend income. While bonds likewise can provide income, the ability for capital appreciation is limited. Conversely, while gold (and other commodities) can appreciate in line with global economic growth, this asset class generates no income.

Source: NBER, Bloomberg, Robert Shiller, American Enterprise Investment Services, Inc.2

Remember: Investing is a journey. Through global unrest, depressions, recessions, and pandemics, the setbacks of the day have not put an end to the stock market’s climb higher. Though uncertainties abound regarding inflation and higher interest rates, a longer-term perspective can help recenter your focus.

Source: NBER, Bloomberg, American Enterprise Investment Services, Inc.3

Reach out to your Ameriprise financial advisor for personalized guidance

Your Ameriprise financial advisor creates a plan catered to your unique situation and accounts for inflation in your retirement portfolio. If you have any questions or concerns about the current inflation environment’s impact on your financial goals, reach out to them.