How does inflation affect retirement savings?

Inflation impacts retirement savings primarily by decreasing the purchasing power of money over time. As inflation rises, the cost of goods and services increases, meaning that a fixed amount of money will buy less in the future than it does today. This is particularly important for retirees, whose income may be fixed (e.g., from pensions or annuities), as they need to ensure their savings can sustain their lifestyle despite rising prices.

When making retirement plans, understanding this relationship helps individuals assess how much they need to save and invest to maintain their purchasing power throughout retirement. Effective strategies often include investing in assets that have the potential to outpace inflation, such as stocks or inflation-protected securities, rather than relying solely on cash savings that may lose value due to inflation over time.