Inflation: The Not So Secret Retirement Killer & What To Do About It - The Art of Simple Trading


Inflation is the silent retirement killer. It creeps up on you slowly, stealthily even... eroding your standard of living and eating away at your assets. Over time, inflation can have a devastating effect on your later life and retirement prospects. But don't worry – there are some simple steps you can take to survive and thrive in retirement despite inflation. In this blog post, I discuss a bit about what inflation is and how it negatively impacts retirement. I also outline a few strategies for dealing with the impact of inflation on your retirement prospects so that the whole thing doesn't turn into a full-blown retirement crisis.

What is Inflation?

Inflation is a general increase in prices and the resulting fall in the purchasing value of your money. When inflation goes up, every dollar you have buys less than it did before. For example, if the price of Item A rises 10%, from $100 to $110 the consumer who could formerly pick up 10 of Item A for $1,000, can now only buy 9 of the same item with the same money. If the consumer of Item A happens to be a manufacturer then Item A is likely one of many inputs into an end product. If that increase in the cost of inputs is more general vs specific to Item A, then the price of the end product must also rise to reflect the general increase in the manufacturer's increased costs.

Spread the phenomenon above across many producers in many industries and Voila... you have inflation.

Rising Costs Vs Fixed Income

Inflation is a major problem for retirees, who are often on some form of fixed income and/or spending down a relatively fixed amount of money. Put simply, rising costs put enormous pressure on fixed incomes because, like the consumer of Item A above, you're unable to consume the same amount of goods and services with the same amount of money. This can become devastating when you think about frivolous extras such as food and shelter, to say nothing of medical care.

As noted, inflation has a similar impact on retirement savings... except maybe worse. The classic approach to retirement is to save a big pile of money and then spend it down at a modest clip over your Golden Years.

The accidental traditional rate is 4% per year or thereabouts. So on a $1,000,000 portfolio, the first year's drawdown would be $40,000 leaving your portfolio irritated, but not yet bruised at $960,000... and yes, I know that many of you are NOT on track to have $1,000,000 saved, but stay with me for the moment.

The next year [let's also assume no growth in assets for the moment even though I know that you won't find yourself in a position of no safe growth on your assets] your same 4% drawdown is $38,400 or 4% of $960,000. This leaves your portfolio at $921,600... still not quite bruised, but you're maybe starting to feel a discomfort similar to a small pebble in your shoe.

By the 3rd year, your portfolio breaks the $900,000 mark to the downside [-36,864 to $884,736]. Not technically all that significant, but as a practical matter it serves as a bit of a rude awakening given that you're only 3 years into retirement and your once formidable million dollar nest egg has shrunk by more than $100,000... and you haven't yet experienced any emergency that would require you to draw down more.

There's a moment that you realize that your income [as determined by drawdown on your assets] is "falling" And that the fall is only exacerbated by that general increase in prices over time... inflation. I've heard from several sources that that moment feels like a kick in the gut. Probably because that's exactly what it is.


While inflation itself is a form of a tax, it can also lead to higher societal taxes, as government payrolls and benefits are often indexed to inflation. In much the same way that the company buying Item A above and experiencing a general increase in the cost of inputs passes at least some of those increases on to consumers of its products in the form of price increases, so too do governments pass on increases in the cost of inputs to its consumers [also known as citizens] by raising it's "prices" in the form of taxes.

For example, a city we'll call Old York experiences simultaneous demands for pay increases from it's largest cost center... it's employees. Police, fire, sanitation, and administration workers all demand increased pay to help combat the inflationary pressures their experiencing in their private lives. Additionally, the costs of all the inputs that allow the delivery of government goods and services are skyrocketing across the board... fire trucks, police cruisers, sanitation trucks, computers, etc. are all experiencing substantial price increases.

As a result, a gap is created between the cost of delivering Old York government goods and services for the next year and the anticipated revenue from taxes. And since the mayor and his administration along with the city council all want to always deliver a balanced budget [without a tremendous increase in debt financing] the only real solution is to increase taxes on all citizens... including its retirees.

Some Things To Do To Protect Yourself [and Your Retirement] From Inflation

So what can you do to protect yourself from inflation? The best defense against inflation is a good offense. Here are some of the offensively defensive moves you can make:

  1. Save more money. This can be difficult for some people, but it is crucial if you want to make sure that you have enough money to last through retirement. Try setting up a budget and sticking to it as best as you can. Make sure that you are contributing to a retirement account such as a 401k or IRA. If your employer offers matching funds, be sure to take advantage of them or you're giving up "free money." Make sure that you are contributing the maximum amount to your retirement account. The current contribution limit for 401ks is $18,000 per year and the contribution limit for IRAs is $5500 per year. If you're 50 or older, you can contribute an additional "catch up" amount of $6000 per year to your 401k and $1000 per year to your IRA.
  2. Live below your means. Whatever your income level, the further inside your income you live, the more freedom and flexibility you'll ultimately have. This may mean making some sacrifices now, but if you take the right steps, it will pay off in the long run. Expand on and explain [live below your means] in more depth including the keywords [keywords] Start by looking at your expenses and see where you can cut back, even if it's just a little bit. If you can reduce your monthly expenses by $100, that's an extra $1200 per year that can go towards retirement savings or paying down debt. It may not seem like much, but over time it can make a big difference. One of the best ways to reduce your expenses is to live in a smaller home or apartment. This will lower your costs for things like utilities, property taxes, and maintenance. It may mean downsizing from a house to an apartment or condo, but this too will be worth it in the long run.
  3. Start a recession-proof business Recession-proof businesses are those that are able to weather an economic downturn and still stay afloat. This is usually because they provide essential goods or services that people need regardless of the state of the economy. Some examples of recession-proof businesses include healthcare, food service, and transportation. These businesses may not be immune to ALL economic fluctuations, but they are much less likely to be impacted as severely as other businesses. If you're thinking of starting a business, research different industries and see which ones are more likely to weather a recession. You can also look for niche markets that may be less affected by an economic downturn. For example, if you're in the healthcare industry, you may want to focus on senior care or home health care. These are areas that are likely to see increased demand during a recession as people age and prefer to stay in their own homes rather than enter a retirement facility.
  4. Finally, learn to trade [the ultimate recession-proof business]. This may seem like an odd suggestion, but hear me out. While it is a risky solution, if done correctly, trading can actually provide a great way to make extra money and protect your retirement prospects from inflation. When you know how to trade, you can take advantage of short-term market fluctuations to make money. This extra income can help you offset the effects of inflation by giving you more buying power. Trading allows you to make money no matter what the economy is doing. There are many different ways to trade, so be sure to do your research before getting started. Once you have a basic understanding of trading, you can start practicing with a demo account. This will allow you to test your strategies without putting any real money at risk.

Take This With You

Bottom line... inflation is a retirement killer, but there are ways to survive and even thrive in spite of it. By following the tips above, you can protect yourself from the impact of inflation and secure a comfortable retirement for yourself. It's important to take action now to mitigate the impacts of inflation. If you don't, you may find yourself struggling to make ends meet later on... and at a time when you can do the least about it. However, by taking steps now to do things like increase your savings rate, live below your means, start a recession-proof business and learn to trade, you can set yourself up for success no matter what the future holds.

Have questions or comments? I'd love to hear from you.