Inflation and a Long Retirement

Contents

1. The arithmetic
2. What the recent record shows
3. How Social Security adjusts
4. Why the adjustment lags
5. Inflation inside the withdrawal rules
6. Inflation as an explicit input
7. Wages, prices and the benefit formula
8. Testing a plan against it
9. The longer the retirement, the larger the effect
10. What remains unsettled

Brent O’Mara has celebrated anniversaries with clients, and the slow arithmetic this entry describes runs underneath every one of those long celebrations. The object is a posted price. The fruit store in the photograph above stood in Lincoln, Nebraska, in the 1940s with its prices chalked on the window, and every figure on that window has been rewritten many times since. Prices that rise a few percent a year double within a generation, and a retirement that lasts thirty years is long enough for that doubling to happen more than once.

The arithmetic

The rule is compounding in reverse. At a steady 3 percent a price doubles in roughly 24 years; at 2 percent it takes about 35. A household retiring at 65 with a budget written in that year’s dollars is, on the figures Time magazine cited, planning for an additional 22 years on average, and a newborn American was by 2015 expected to live to 90.⁸ Money’s warning is that inflation eats the purchasing power of idle cash and of fixed incomes, and that it falls on retirees at the moment they lose a paycheck and begin spending more on health care, whose costs rise especially fast.²

What the recent record shows

The typical rate in recent decades has been around 2 to 3 percent, but some years run far hotter: in 2022 the consumer price index reached 9 percent, measured over twelve months to June.²¹ By July 2025 the same index had fallen back to 2.7 percent, still with a modest uptick that CNBC noted when it interviewed Bill Bengen about the rule he invented.¹

Figure

Three readings from the recent record

the consumer price index in June 2022, measured over twelve months

9 percent

the same index in July 2025

2.7 percent

the record cost of living adjustment for 2023, mostly claimed by higher prices

8.7 percent

How Social Security adjusts

A Social Security benefit is locked in at the claiming age, but the amount is generally raised each year for increases in the cost of living.⁶ The adjustment is set each fall from inflation data for July, August and September. For 2026 it was 2.8 percent, about 56 dollars a month for the average recipient, whose payment rose to 2,071 dollars in January.³ WOWT in Omaha reported the 2027 figure at 3.6 percent, up from 2.8 percent in 2026 and 2.5 percent in 2025, with the Department of Veterans Affairs matching it for military retirees and disabled veterans, which works out to 36 dollars more for each 1,000 dollars of military pension.⁷

Figure

Social Security cost of living adjustments

• 20252.5
• 20262.8
• 20273.6

Why the adjustment lags

The adjustment follows a general price index, and retirees do not buy the general basket. When the 2026 figure was announced the head of the National Council on Aging called it woefully inadequate beside the Medicare cost increases due the same year.³ Bengen made the same point about the 8.7 percent increase paid for 2023, a record: it may have looked generous, but prices had already eaten most of it.¹ Time added the longer trend, that two thirds of large companies offered retiree health benefits a quarter century before 2015 and only a third did by then, leaving more of that fastest rising cost to the retiree.⁸

Inflation inside the withdrawal rules

The four percent rule carries an inflation assumption in its design: the first year’s dollar withdrawal is raised each year in step with prices, and Bengen devised it in an era when inflation was low and steady.¹ He calls inflation the greatest enemy of retirees, warns that a surge early in retirement shortens how long a portfolio lasts, and advises retirees to respond immediately and strongly when it appears, which for most means spending less.¹ In 2015 Time reported that planners were already dropping the customary rate from 4 percent to 3 in a low rate era.⁸

Inflation as an explicit input

Jack Guttentag’s proposed replacement for the rule, published in Forbes in 2018, makes the assumption visible. Its inputs are the retiree’s age and sex, the value of financial assets, the age to which the draws must last, the assumed return and the yearly increase the retiree wants in the monthly draw, and his worked example assumes 2 percent.⁴ He called that variable easy to overlook and noted that with no increase at all the draw amounts would be about 20 percent higher, which is what ignoring rising prices costs.⁴

Wages, prices and the benefit formula

Inflation enters Social Security a second way. Initial benefits are indexed to wage growth, which the Urban Institute put at an average of about 3.9 percent since 2000, so that new retirees’ benefits keep up with living standards, while the yearly adjustment after claiming follows prices.⁵ A 2026 proposal to cap benefits and index the caps to the chained consumer price index, which grew about 2.5 percent on average over the same period, would gradually flatten the formula; for a maximum earner claiming at 67 the share of wages replaced would fall from 30 percent to 22 percent after twenty years and 15 percent after fifty.⁵

Figure

Wage indexing beside price indexing

	Average wage growth	Chained consumer price index
Average yearly growth since 2000	about 3.9 percent	about 2.5 percent
Role in Social Security	sets initial benefits so they keep pace with living standards	proposed by some as the index for capping benefits
Wages replaced for a maximum earner claiming at 67	30 percent today	22 percent after 20 years and 15 percent after 50 under the proposal

Testing a plan against it

Money’s practical advice is a stress test: run the numbers to see whether a retirement income keeps up with inflation, so that a surge does not arrive as a surprise, and set a withdrawal plan for the first five years that does not require selling long term holdings in a bad year.² The second half of that advice concerns the order in which returns arrive, which the entry on the sequence of returns covers. How much inflation protection a particular plan needs depends on each family’s circumstances; qualified professionals can run those numbers.

The longer the retirement, the larger the effect

The reason inflation belongs in a retirement entry at all is length. The claiming decision locks in a base that the adjustment then compounds for life, which is one reason the arithmetic favors a larger starting benefit for those who can wait, and the same base compounds for a surviving spouse.⁶ Over the 22 years Time counted from 65, a 3 percent rate roughly halves what a fixed dollar buys.⁸

What remains unsettled

Three things stay open. Future inflation cannot be known, which is why Bengen’s own tables ask retirees to estimate the inflation of their early retirement years before reading off a rate, and why no single figure settles the question.¹ Whether the general price index fits a retiree’s basket is contested, as the reaction to the 2026 adjustment showed.³ And the program that delivers the adjustment faces a projected trust fund exhaustion in 2032, after which it could pay only what it collected, with Congress having last made fundamental changes in 1983.⁵ How long the plan must stretch is where the next entry begins.