Over a long retirement inflation is not a background detail — it is the main event. At typical rates it cuts the purchasing power of a dollar roughly in half across a 25 to 30 year retirement, quietly, without a single bad market day.
Purchasing power in today's dollars, with no withdrawals — just growth against inflation.
Inflation is the risk that never appears on a statement, which is exactly why it catches people out.
A market crash announces itself. Your balance drops, it's in the news, you feel it. Inflation does the opposite: your balance stays exactly the same while what it buys shrinks a little each year. Nobody sends you a letter about it.
Over a year or two it genuinely doesn't matter much. Over a thirty-year retirement it's the main event. At 2.8% a year — an unremarkable rate — money loses half its purchasing power in about 25 years. A person retiring at 65 should expect the second half of their retirement to cost roughly double the first.
Raymond has $750,000 and spends $60,000 a year. He's cautious by nature and keeps almost everything in term deposits earning 3%, which after tax and fees is closer to 2.2%. Inflation runs at 2.8%.
Each year he's going backwards by about 0.6% in real terms. It's invisible — the statement always says a comfortable number — but after 30 years his $750,000 buys what roughly $630,000 buys today, and the $60,000 lifestyle he's used to costs about $137,000 a year.
He hasn't lost money. He's lost purchasing power, which spends exactly the same. A balanced portfolio over the same period would have left him with over $1.1m of buying power. The gap is what "playing it safe" cost.
Your personal inflation rate is usually higher than the published one. Headline figures are an average across everything people buy, including goods that get cheaper — televisions, clothing, computers. Retirees spend a larger share on the things that rise fastest: healthcare, insurance, home services, energy. Nudging the inflation input up half a point from the official figure is a reasonable adjustment rather than pessimism.
None of this argues for taking risk you can't afford. It argues for not mistaking "no visible losses" for "no losses". The allocation calculator works out where the balance sits for your situation.
General information only — not financial advice. Inflation is assumed constant, which it never is; your own inflation rate depends on what you actually buy, and retirees typically face higher-than-headline inflation because healthcare and services rise faster than average. Returns are shown before tax except for the drag figure you enter.