There is a number that doesn't get enough attention in retirement planning conversations. It isn't your rate of return. It isn't your account balance. It's the inflation rate — and whether your plan is built around the right assumptions from the very beginning.
The Setup
Begin with a hypothetical $3,000,000 earning a steady 5% per year. In year one, withdrawals begin at $120,000 — a responsible 4% withdrawal rate. The math works, the portfolio is positioned to grow modestly in the early years, and the future looks stable.
But because the cost of living rises every year, those withdrawals cannot stay flat. A retiree who withdraws $120,000 today may need more tomorrow just to maintain the same standard of living. That's not a lifestyle choice — it's arithmetic.
Two Paths, One Percentage Point Apart
When withdrawals increase at 2% per year — the Federal Reserve's inflation target[i] — the portfolio earns 5% annually and manages the outflows with discipline. The blue line in the chart peaks just above $3,000,000 in the early years, then declines gradually and gracefully, finishing close to $2,400,000 after 30 years. The income never stopped. The lifestyle never eroded. The plan worked.
Now consider what happens when inflation runs at just 3% instead — requiring withdrawals to increase that much faster every year. The blue bars tell that story. After 30 years, the same $3,000,000 portfolio has declined by two-thirds, to approximately $1,000,000. Still positive — but for how much longer? And what would happen at 3.5%? Or 4%?
Why It Matters Right Now
At 2%, a well-structured portfolio can absorb rising withdrawals while protecting the underlying asset base.
Today's inflation environment, where rates have persisted above 3%, is not merely an economic headline. For anyone in or approaching retirement, it is the variable most worth watching and most worth planning around.
The difference between a retirement that lasts and one that doesn't may come down to a single percentage point, held over a very long time.
That conversation is worth having now. Reach out to us if you’d like to discuss this further.
Hypothetical illustration. The information presented should not be used as the basis for any specific investment advice. Hypothetical examples are not intended to suggest a particular course of action or represent the performance of any particular financial product or security.