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Inflation’s impact on your retirement: 3 things to consider

AS OF MAR. 06, 2023


U.S. households are currently facing the highest surge in inflation since the early 1980s. When it comes to day-to-day expenses such as groceries and utilities, the impact of rising prices is obvious and immediate. But what may not be as apparent is the effect that inflation has on your long-term financial goals, like retirement.

As you seek to make sense about how inflation can impact your retirement, here are three things to consider.

1. Understand the “real” effect of inflation on your long-term goals

The recent acceleration in prices has pushed inflation to the forefront of many investors’ minds. But it’s important to remember that, even when inflation is at 1–2%, it can have a significant effect on your retirement portfolio. Consider the tables below, which examine the effects of inflation from two perspectives:

Future purchasing power of $1 million today based on an inflation rate of:
  1.0% 1.5% 2.0% 2.5% 3.0%
15 years $861,349 $799,852 $743,015 $690,466 $641,862
20 years $819,544 $742,470 $672,971 $610,271 $553,676
25 years $779,768 $689,206 $609,531 $539,391 $477,606
30 years $741,923 $639,762 $552,071 $476,743 $411,987


How much would it take in the future to equate to $1 million today based on an inflation rate of:
  1.0% 1.5% 2.0% 2.5% 3.0%
15 years $1,160,969 $1,250,232 $1,345,868 $1,448,298 $1,557,967
20 years $1,220,190 $1,346,855 $1,485,947 $1,638,616 $1,806,111
25 years $1,282,432 $1,450,945 $1,640,606 $1,853,944 $2,093,778
30 years $1,347,849 $1,563,080 $1,811,362 $2,097,568 $2,427,262


Simply, if inflation averages 2% over 30 years:

  • Your million-dollar portfolio gives you a lifestyle that is little more than half of what it does today (top table).
  • You would need a portfolio of just over $1.8 million dollars to live the same lifestyle as you do today with your million-dollar portfolio (bottom table).

Long-term inflation numbers are typically more stable and less noticed; however, the effect can be substantial over time, particularly for those whose income doesn’t adjust.


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2. Avoid sidelining assets

In an effort to slow the economy and tame inflation, the U.S. Federal Reserve has ratcheted up its benchmark Fed Funds rate. As a result, we’ve seen an increase in interest rates for fixed-income investments, more volatility in the stock market, moves higher in commodities, gold and other “safe haven assets,” and more investors moving to the sidelines until markets normalize.

While these past two years have been unusual, we believe short-term inflation may settle, and the economy may get back on trend over the next several quarters. Further, stocks tend to move higher ahead of economic recovery.

In times of uncertainty, it may be tempting to remove yourself from the market but staying invested — at a level that reflects your tolerance for risk — is important in our view. History shows the markets have bounced back after losing value, and it's likely for this to happen again should major dips occur in the future. As the chart below shows, missing even a handful of days can have a long-term impact on your savings.

Source: Bloomberg, Standard and Poor’s, American Enterprise Investment Services, Inc.1


3. If you’re far away from retirement, consider stocks as a long-term hedge

Stocks have a mixed track record when it comes to inflation. Over the short term, a sudden spike in inflation can have a negative impact on stocks, as investors may anticipate that higher inflation will lead to higher interest rates and reduced consumer spending. Further, corporate profits and margins may deteriorate if they can’t pass along rising prices.

Over the long run, however, stocks can be seen as a potential hedge against inflation. Since 1871 stocks have historically outperformed inflation and have done so more consistently than other asset classes.

Companies are typically able to increase their prices and pass on the costs of inflation to consumers during times of economic growth, which can lead to higher earnings and, in turn, the potential for higher stock prices and dividend income. While bonds likewise can provide income, the ability for capital appreciation is limited. Conversely, while gold (and other commodities) can appreciate in line with global economic growth, this asset class generates no income.

Source: NBER, Bloomberg, Robert Shiller, American Enterprise Investment Services, Inc.2


Remember: Investing is a journey. Through global unrest, depressions, recessions, and pandemics, the setbacks of the day have not put an end to the stock market’s climb higher. Though uncertainties abound regarding inflation and higher interest rates, a longer-term perspective can help recenter your focus.

Source: NBER, Bloomberg, American Enteriprise Investment Services, Inc.3


Reach out to your Ameriprise financial advisor for personalized guidance

Your Ameriprise financial advisor creates a plan catered to your unique situation and accounts for inflation in your retirement portfolio. If you have any questions or concerns about the current inflation environment’s impact on your financial goals, reach out to them.

1Returns assume investor was fully and continually invested in the S&P 500 Total Return Index except for the days specified. Calculations assume no fees or transaction costs. Past performance is not a guarantee of future results.
2Stock performance is based on the following: 1871 - 1917, Cowles Commission Index as converted by the Standard & Poors Corporation and available through the National Bureau of Economic Research (NBER). 1918 - 1956, monthly average of the weekly Standard and Poor's weekly composite price index based on Wednesday's close and as available by the NBER. 1957 through the current, monthly closing price of the Standard and Poor's 500 Price Index.
Bonds are based on Professor Robert Shiller database available at where he spliced U.S. Long-Term Government Bonds from 1871 through 1953 and the U.S. 10-Year Treasury Bond from 1953 onward.
Inflation is based on Professor Robert Shiller database available at where he spliced CPI Warren and Pearson’s price index from 1871-1912 to the CPI-U published by the U.S. Bureau of Labor Statistics from 1913 onward.
*Gold prices were largely fixed prior to 1971. Data represents 1971 onward.
3Data shown is based on the following:1871-1917, Cowles Commission Index as converted by the Standard & Poors Corporation and available through the National Bureau of Economic Research (NBER). 1918-1956, monthly average of the weekly Standard and Poor’s weekly composite price index based on Wednesdy’s close and as available by the NBER. 1957 through current, monthly closing price of the Standard and Poor’s 200 Price Index. Recessions are as defined by the NBER and highlgihted by the vertical gray bars. Data presented in log scale.
The views expressed in this material are as of the date published and are subject to change without notice at any time based on market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. This information may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.
This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned.  The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.
The fund’s investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market. Over 70% of all US equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
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