Fixed Inflation Assumptions Are Failing Retirees—Here’s a Smarter Way to Plan
Imagine this: You’re finally retired. You’ve run the numbers, talked to your advisor, and felt confident about your ability to withdraw $10,000 per month from your retirement savings. The plan says it’s enough. You’ll be fine for 35 years – as long as inflation stays at 3%, the historical average over the past 100 years. So, you settle into your new rhythm, take the occasional trip, help the kids when needed, and enjoy the freedom you worked so hard for. But then something unexpected happens, and inflation doesn’t stay at 3%. It surges to 6%. Then drops. Then, it spikes again. Groceries are more expensive. Gas prices sting. Healthcare premiums climb. Suddenly, that $10,000 doesn’t stretch as far—and the cushion you thought you had starts to shrink. The plan didn’t break in one big moment. It slowly wore thin. That’s the hidden danger of planning with a fixed inflation assumption: it makes retirement look smoother than it really is. Here’s the reality—retirement is lived in real time, and inflation shows up in unpredictable ways. Sometimes, it’s early, sometimes late, and sometimes not at all, until it hits hard. And when it does, it’s not just a number on a spreadsheet. It’s a budget cut, a lifestyle shift, a postponed dream, or a tough conversation with a loved one. Too many financial plans still assume inflation is calm, consistent, and linear. But that’s not what history shows. And it’s not what real retirees experience. In this post, we’ll unpack why fixed inflation assumptions are failing today’s retirees—and what a more innovative, more flexible planning approach looks like in a world where inflation won’t remain consistent. The Problem with Fixed Inflation in Financial Planning Many retirement plans use a fixed inflation rate, usually 2% or 3%, year after year. It makes the projections look neat, clean, and easy to follow. Some plans allow for different inflation levels for specific categories (such as core CPI assumptions and health care inflation assumptions). But they still tend to be fixed over the life of the plan. If your advisor has made a retirement plan for you, then look at the inflation rate in the assumption section. If there is no mention of standard deviation, then it is probably fixed. But here’s the issue: real-life inflation doesn’t behave that way. And pretending it does can quietly lead retirees into trouble. Take a look at the chart below from the Bureau of Labor Statistics. If you removed the title and the legend on the chart above, you might think it showed the 12-month percentage change in a stock. There is nothing fixed about the change of inflation from one year to the next. What’s the problem with using fixed inflation? It assumes predictability in a world that’s anything but predictable. It creates a false sense of security, suggesting your dollars will always lose value slowly and steadily. It hides real risk, especially early in retirement, when spending is typically highest. It ignores history, where inflation has varied wildly—even within short time frames. Take the last few years, for example. We’ve seen inflation dip near zero, then spike above 8%. That’s not a gentle 3% slope. It goes up and down like a rollercoaster. Why does this matter for retirees? Retirees often live on fixed or semi-fixed income. Spending power is most vulnerable in the early years of retirement. Early inflation shocks can permanently reduce long-term financial stability. It’s like building your retirement plan on the assumption that every day will be sunny. You may be fine for a while—until the storm hits. And by the time it does, the damage can be hard to reverse. Fixed inflation models may lead to: Overconfidence in early retirement spending Plans that don’t adapt to real-world price changes Unexpected shortfalls later in life In short, using a fixed rate might make the math easier – but it doesn’t make the plan better. If we want to build plans that hold up in real life, we need to start treating inflation like the unpredictable force it truly is. Inflation Behaves Like Market Returns—Uncertain and Variable Think about how you experience returns in the stock market. You know that returns won’t be the same every year. What matters is the long-term trend. That’s baked into every good investment plan. We look at hundreds of possible economic outcomes using Monte Carlo simulations, we look at the variability of returns in different scenarios, and we fully expect there to be ups and downs. But here’s the irony – we don’t give inflation the same respect. Inflation is every bit as unpredictable as market returns—sometimes even more so. One year it’s under control, the next it’s climbing at a rate no one saw coming. Just like the market, inflation moves based on forces outside our control: geopolitics, supply chains, energy prices, monetary policy, consumer behavior—you name it. And just like the market, inflation is never linear. Yet, too often, we still treat it like it is. In less-advanced planning software, inflation is typically entered as a single, fixed number. That number might differ across spending categories—say, 3% for general expenses, 5% for healthcare—but it’s still locked in, year after year. There is no variance, no sequence risk, and no acknowledgment that retirees will feel those price changes differently depending on when they happen. But just as there’s a sequence of returns risk – where bad market years early in retirement can derail a portfolio – there’s a sequence of inflation risk, too. And it’s just as dangerous. If inflation is high early on, especially when spending is at its peak, it can permanently shrink a retiree’s future purchasing power. The problem is that even if average inflation is 3%, the order in which it happens matters. That’s why two retirees can both face 3% average inflation, but one ends up fine while the other struggles—simply because the timing was different. So, if we’re willing to model market risk with flexibility and nuance, shouldn’t we