What Inflation Is and How It Affects Your Purchasing Power in Retirement
Inflation and affordability are top concerns for many retirees today. While most people understand that inflation raises the cost of goods and services, more retirees are now asking how inflation could impact their long-term financial security.
On top of that, many people wonder how inflation will impact annuity payouts, and if there are strategies to protect their annuities from inflation.
This article explains what inflation is and how it impacts your purchasing power—how much you can buy with your hard-earned money.
What is Inflation?
Simply put, inflation is the price of goods and services increasing over time. It’s important to understand that inflation refers to price increases that are not temporary, but are expected to persist over time.
Let’s consider the price of oranges as an example. If a winter frost in Florida hurts orange crop yields, this reduction in orange supply would likely result in a temporary increase in the price of oranges. When orange crops rebound, you would also expect orange prices to come back down.
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While temporary supply related price increases impact the short-term affordability of products, they are not considered inflation unless prices are expected to remain at elevated levels.
Inflation, on the other hand, is price increases that are expected to last. Rising housing costs, medical expenses, and energy prices that are not expected to go back down would be considered inflation.
Does the Difference Between Affordability and Inflation Matter?
If the price of orange juice goes up for a year due to bad weather in Florida, your morning OJ may be more expensive temporarily. While this certainly would have an impact on your short-term bottom line, when prices go back down your purchasing power returns to normal.
However, if energy prices go up with inflation, they are expected to remain elevated. This means that your heating or cooling bill is expected to be higher indefinitely.
Does Inflation Affect Retirees Differently?
When you plan for retirement, you should be accounting for your living expenses. While temporary price increases can impact what you can afford short-term, inflation can have a much bigger impact on your financial well-being long-term.
Retirees are often reliant on fixed-income sources, meaning persistent price increases from inflation can have a significant impact on their long-term finances.
Is Inflation Bad?
The Federal Reserve Bank has a target inflation rate of 2%. If inflation was bad, why would they want any inflation at all?
The reason is that modest inflation is the sign of a good economy. Prolonged very low or negative inflation can be a sign of a stagnating or weakening economy.
However, too much inflation can make what people need to live and be happy too expensive. If inflation rises too much, people may not be able to afford things they want or need. This is not only bad for people, but it also hurts the economy.
Generally speaking, some inflation is considered good and necessary for a strong economy, while too much or too little can hurt your pocketbook and the economy.
What is purchasing power?
Purchasing power is what you can buy for your money. As inflation increases, your purchasing power goes down.
We have a simple chart below that shows you how different inflation rates impact your purchasing power. Our example shows what inflation does to a $50,000 annual income over 25 years. This example assumes no income increases and illustrates the impact of inflation alone.
Key Takeaways: Inflation rates have a significant impact on purchasing power when considered over several decades, which is often the planning horizon for retirees.
Why Inflation Is Especially Risky for Fixed Income
As you can see, inflation can have a very big impact on your purchasing power over several decades. Even at the target of 2% inflation, your purchasing power is cut from $50,000 to $30,000 at the end of twenty-five years.
If your income is fixed, meaning that it does not increase over time with inflation, your purchasing power becomes more and more diminished over the years.
Can You Protect Your Retirement Income From Inflation?
Yes! The good news is that you can protect your retirement income from inflation. While there are some investment vehicles specifically designed to track inflation, you can also add inflation protection to an income annuity through a Cost-of-Living-Adjustment (COLA).
A COLA increases your annuity payout rate by a fixed percent each contract year. While this does not truly track inflation, it helps protect your purchasing power by increasing your income annually. It is important to note that adding a COLA to your annuity will decrease your initial payments.
If you are curious how much guaranteed, lifetime income you could get from a COLA annuity, just use our blue annuity calculator on this page. You can choose your COLA rate and compare it against level-pay options. You’ll get guaranteed quotes from top-rated companies instantly. Our calculator is fast, free, and easy to use. There is no phone number required and no obligation.
And if you want more information on COLA annuities check out some of our featured articles:
- How do Cost-of-Living-Adjustment Annuities Work?
- Are COLAs worth it?
- Strategies to manage inflation with annuities
The Bottom Line
Inflation is the persistent increase in the prices of goods and services you need to live and thrive. While too much inflation means you can afford less, too little can be a sign of a faltering economy.
Planning for and managing inflation risk in your retirement is important because inflation impacts your purchasing power: how much you can buy with your money.
There are a variety of annuity strategies you can use to manage inflation risk and guarantee lifetime income from a top-rated insurance company.
References:
- Ross, Sean. "Benefits of Inflation: How It Drives Economic Growth", Investopedia, October 31, 2025.
- "What is inflation, and how does the Federal Reserve evaluate changes in the rate of inflation?" Federal Reserve
- "What is Inflation?" Federal Reserve Bank of Cleveland
