How much will inflation erode my retirement savings?

TL;DR. At 3% inflation, $1 today is worth just $0.55 in 20 years — so a $1,000,000 nest egg buys only $553,000 of today's goods. Model real (inflation-adjusted) returns instead of nominal returns, and budget healthcare inflation separately at roughly 5% per year, because medical costs erode purchasing power nearly twice as fast as general prices.

Real returns vs. nominal returns: why the distinction matters

Most investment accounts report nominal returns — the number before subtracting inflation. If your portfolio gains 7% in a year and CPI-U inflation runs 3%, the real return is only about 3.9% (calculated as (1.07 / 1.03) - 1). Over short horizons the gap seems small; over 20-30 years it is enormous.

Here is a worked example. A 55-year-old has $800,000 in a 60/40 portfolio targeting 7% nominal growth with plans to retire at 65. At 7% nominal, the balance projects to roughly $1,573,000 at retirement. But at 3% average CPI inflation, the real (today's-dollar) value of that balance is only about $1,171,000. And healthcare — which the BLS pegs at roughly 5% annual inflation over the past two decades — will consume an even larger share. If healthcare spending is $12,000 per year today, at 5% inflation it reaches $19,500 by age 65 and $51,800 by age 85. That single line item can consume 15-20% of retirement income in later years.

The takeaway: every retirement projection should subtract inflation from the assumed return rate. An inflation impact calculator does exactly that — it shows the purchasing-power gap between what your balance says and what it actually buys.

Try it with your numbers

What a good inflation impact calculator should show

• Year-by-year purchasing power of your savings in today's dollars versus nominal future dollars.
• Side-by-side comparison of real vs. nominal portfolio growth through your full retirement horizon.
• A separate healthcare inflation adjustment (default ~5%) layered on top of general CPI (~3%).
• The exact age at which inflation-adjusted withdrawals outpace portfolio growth.
• Sensitivity toggles for different inflation scenarios (2%, 3%, 4%) so you can stress-test assumptions. AdvisorCal's Inflation & Retirement Calculator handles all of the above. Pair it with the Withdrawal Longevity Calculator to see when your portfolio runs out in real dollars, or the Savings Growth Calculator to model how much more you need to save to keep pace with rising costs.

Key facts

• CPI-U long-run average: approximately 3.2% per year since 1926 (BLS).
• Recent CPI-U (2025): approximately 2.8% year-over-year.
• Healthcare inflation: roughly 5% per year over the past 20 years — nearly double the general CPI rate.
• Purchasing power at 3% inflation: $1 today buys $0.74 of goods in 10 years, $0.55 in 20 years, and $0.41 in 30 years.
• Real return rule of thumb: subtract inflation from nominal return; for precision use (1 + nominal) / (1 + inflation) - 1.
• TIPS breakeven (10-year, 2026): approximately 2.3%, the market's implied inflation expectation.

Common follow-ups

What inflation rate should I use for retirement planning? Most financial planners use 2.5-3.5% for general expenses, which brackets the Fed's 2% target and the long-run CPI average of 3.2%. However, retirees spend disproportionately on healthcare, housing maintenance, and insurance — categories that routinely outpace headline CPI. A conservative approach is 3% for general spending and 5% for healthcare, modeled separately in an inflation-adjusted retirement calculator.

How does inflation affect a fixed pension or annuity? A fixed pension that pays $3,000 per month today will still pay $3,000 in 20 years, but that payment will buy only about $1,650 worth of today's goods at 3% inflation. Unless the pension includes a cost-of-living adjustment (COLA), its real value declines every year. Social Security does include a COLA, but private pensions and fixed annuities typically do not. The calculator shows you exactly how this gap widens over time.

Is inflation more dangerous early or late in retirement? Both, but in different ways. High inflation early in retirement compounds the damage over more years (similar to sequence-of-returns risk). High inflation late in retirement hits when the portfolio is smaller and healthcare costs are highest. Modeling both scenarios in a purchasing power calculator reveals which phase poses the greater threat to your specific plan.

Should I invest more aggressively to beat inflation? Equities have historically outpaced inflation over long horizons — the S&P 500 has delivered roughly 7% real return since 1926. But higher equity allocation means more volatility, which is dangerous in the distribution phase. The answer depends on your withdrawal rate and time horizon. Use the Retirement Readiness Calculator alongside the inflation tool to find the right balance between growth and stability.

When this doesn't apply

Inflation-adjusted projections assume a diversified portfolio funding ongoing withdrawals. They are less relevant for retirees whose income is fully covered by COLA-adjusted sources (Social Security plus a COLA pension), for short planning horizons under five years where inflation impact is minimal, or for assets like TIPS and I Bonds that are explicitly indexed to CPI. In those cases, nominal and real values converge and the inflation adjustment adds little planning value.

Sources

• Bureau of Labor Statistics — CPI-U Historical Data
• U.S. Treasury — TIPS Rates and Breakeven Inflation

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