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It's been a while since it was a big part of American life. Inflation has been so low that Social Security payments were not increased for 2016, and the Federal Reserve has even raised the possibility of negative interest rates.
Yet inflation has not disappeared, and for retirees, even low inflation can have an outsized effect on their finances, according to recent research by the Limra Secure Retirement Institute. At the Federal Reserve's target rate of 2 percent, inflation could erode more than $73,000 of a retiree's purchasing power over 20 years if that person were receiving the monthly average Social Security retirement payment of $1,341. At 3 percent, purchasing power would shrink by more than $117,000.
"Seniors or retirees face a different inflation environment than nonretirees, " said Matthew Drinkwater, an assistant vice president at the institute who participated in the research. As a result, inflation is near the top of the list of things people fear about retirement.
Inflation hits retirement savings particularly hard because those no longer working often spend more money on categories where prices are rising faster, like health care. Health spending per person for those over age 65 was more than $18,000 in 2010, triple what working-age people spent, according to a December report by the Centers for Medicare and Medicaid Services.
In 2014, per person health-care spending grew 5.4 percent, well above the overall inflation rate of less than 1 percent, and the center expects spending to rise at an average rate of 5.8 percent a year from 2014 to 2024.
Not surprisingly, spending on health care also increases as people age. A study by JPMorgan calculated median annual health-care costs for today's 65-year-olds at $4,660, but they project annual increases of 6.2 percent to 7 percent as that group ages, so that by 2036, when those people are 85, their median annual health-care spending will reach roughly $18,000.
Retirees also tend to spend more on housing than other groups, and cost increases in that sector have slightly outpaced inflation, the study found.
The worries about inflation's impact on savings come at a time when retirement finances are in flux. Fewer people are retiring with pensions, and 401(k) balances, on average, are alarmingly low. The median 401(k) balance in 2014 was about $18,000, down from 2013, according to the Employee Benefit Research Institute. Balances do tend to increase with age, yet even so, roughly three-fourths of people surveyed by the institute had less than the average $76,000 in their accounts.
In addition, because inflation overall is low, the Social Security Administration did not make a cost-of-living adjustment to its benefits for 2016. That makes inflation even more painful for seniors, since 22 percent of elderly married couples and about 47 percent of elderly unmarried people count on Social Security benefits for 90 percent or more of their income.
To date, financial advisors may not have fully grasped their clients' worries about inflation and its effect on their retirement savings. A separate survey of advisors, retirees, and preretirees by the Limra institute found that advisors ranked inflation fourth out of five major retirement concerns.
However, both retirees and preretirees ranked it second, behind only changes to programs like Social Security and Medicare.
Drinkwater said the new investing rule announced in early April by the Labor Department may spur advisors and clients to work more closely on keeping inflation's effects at bay.
"Inflation can be managed in a more holistic way if advisors go out of their comfort zone of just managing investments," he said. "The issue is forced by the DOL regulations, pushing everybody in the direction of thinking in terms of the individual's overall needs."