Does Social Security keep up with inflation?
Social Security benefits generally get a cost-of-living adjustment each year based on the Consumer Price Index for urban wage earners (CPI-W). Your personal costs may rise faster or slower.
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How Does Inflation Affect Retirement Income?
Inflation means prices rise over time, so the same amount of income buys less each year. In a retirement that can last 25 years or more, even modest inflation can greatly reduce what a fixed monthly income covers. Social Security generally adjusts for inflation each year, while many pensions and some annuity payments stay the same, so plans should account for rising costs.
Written and reviewed by Dan Hopwood, Retirement Income Specialist · Retirement Income Knowledge Center
What inflation does to a fixed income
Put another way, at 3% yearly inflation a dollar buys only about 55 cents' worth of today's goods after 20 years.
Illustrative effect of 3% yearly inflation
- Monthly budget today
- $4,000
- Same lifestyle in 10 years
- About $5,376
- Same lifestyle in 20 years
- About $7,224
Illustration only. Assumes prices rise exactly 3% every year. Actual inflation varies from year to year.
Which income sources adjust
- Social Security: generally receives a yearly cost-of-living adjustment tied to a government price index.
- Pensions: many private pensions do not adjust; some government pensions do. Check your plan.
- Annuities: most pay a level amount; some offer increasing payments in exchange for a lower starting payment.
- Withdrawals from savings: you choose the amount, but raising it each year uses savings faster.
Retiree costs can rise differently
The price index used for the whole country may not match your own spending. Retirees often spend more on healthcare, which has at times risen faster than overall prices. It is worth planning for your own likely costs.
Ways people plan for inflation
Common approaches include delaying Social Security to get a larger inflation-adjusted benefit, keeping part of savings for later-year increases, and choosing income options that rise over time. Each has trade-offs.
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Common questions
What inflation rate should I plan for?
No one knows future inflation. Many people test their plan at a few different rates to see how sensitive it is.
Why does inflation matter more in retirement?
While working, raises can offset rising prices. In retirement, much of your income may be fixed, and the time frame is long.
How much will prices rise over a 25-year retirement?
No one knows exact future inflation. As an illustration only, prices rising 3% a year would roughly double in about 24 years. The Bureau of Labor Statistics publishes past inflation data you can review.
Do annuities adjust for inflation?
Most fixed annuity payments stay level unless the contract includes an increasing-payment option, which usually starts with a lower payment. Some income riders offer increases under specific conditions. Check the contract terms to see how, or whether, payments can rise.
How much will $5,000 a month be worth in 20 years?
Illustration only: if prices rise 3% a year, $5,000 in 20 years would buy about what $2,770 buys today. Real inflation may be higher or lower. That is why fixed income can feel smaller over a long retirement.
Do Medicare premiums go up over time?
Medicare Part B premiums are set each year and have generally risen over time. They are often deducted from Social Security checks, so a premium increase can shrink part of a cost-of-living raise. Higher incomes can also pay IRMAA surcharges.
How can I plan for inflation if most of my income is fixed?
People often pair fixed income with sources that may grow, such as Social Security's yearly adjustments or savings kept for later years. Building a rising budget into your plan helps you see the gap over time. No approach guarantees keeping pace with inflation.
Authoritative sources
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.