What is inflation, in relation to retirement savings?

Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. In the context of retirement savings, inflation is particularly significant because it directly affects the purchasing power of money, including the savings accumulated for retirement. As prices rise, the same amount of money will buy fewer goods and services in the future compared to today.

For example, if you have a set amount of retirement savings, inflation can reduce your ability to maintain your current standard of living during retirement. If the cost of living increases at a rate that outpaces the growth of your retirement savings, you may find that the money you have saved will not stretch as far as you initially anticipated when it comes time to use it. Therefore, understanding and accounting for inflation is essential for effective retirement planning, ensuring that savings will be sufficient to cover future expenses.

Other options do not accurately describe inflation's effect on retirement savings. For instance, inflation is not about increasing savings interest rates, which can vary independently of the inflation rate. Additionally, it certainly does not denote a decrease in living costs; rather, it describes an increase in costs, and it is also not simply a measure of investment performance, which is a separate concept.