"For decades, retirement planning has assumed inflation would average around 2-2.5% annually, and financial planners built withdrawal strategies, income projections, and spending budgets around this number. Then 2021 happened, then 2022 happened, and suddenly the world saw inflation numbers hovering around 7%, 8%, and even 9% depending on where and how it was measured. Thankfully, inflation has cooled off from those levels, and today it's hovering right around 3%, rather than even higher, even though the Fed did promise a 2% inflationary number."
"While a 1% difference over the course of a year might sound small, compound this number over a 25-30 year period during retirement, and it's the difference between your money lasting and running out a decade earlier than planned. The math is pretty brutal if you start to dive into it. At a 2% inflation rate, your purchasing power is cut in half over 35 years, while at 3%, it cuts in half over 24 years, and at 4%, it's 18 years."
Retirement planning long assumed inflation near 2–2.5%, but recent years produced much higher rates that altered long-term projections. Even a 1% annual increase in inflation compounds dramatically over 25–30 years and can cut retirement purchasing power far sooner than expected. At 2% inflation purchasing power halves in 35 years; at 3% it halves in 24 years; at 4% it halves in 18 years. Retiring at 60 with sustained 3–4% inflation can leave an individual at age 80 with roughly half the original buying power and facing extended years with insufficient funds. Fixed-income withdrawal rules adjusted for low assumed inflation can fail under persistent higher inflation.
Read at 24/7 Wall St.
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