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Almost two weeks ago, we received the inflation numbers for February, and they were slightly better than markets expected..
But what happens when inflation, even at the Fed’s target rate of 2%, is compounded over longer lifespans, including as much as 50 years past the age of retirement?
Our whitepaper, “Is Our Industry Prepared for Retirees’ Longer Lifespans?” explored this and found alarming results.
Below is an excerpt from the whitepaper explaining these findings; click here to read the full paper.
How Our Industry Has Changed
I was taught the age-based asset allocation strategy when I entered the financial services industry. This simple approach recommended that an investor hold a percentage of fixed-income assets equal to their age, with the remaining portion invested in stocks. This resulted in a gradual decrease in stock allocation as the investor grew older to reduce risk.
At age 65, our client would have 65% in fixed income and 35% in equities, with the equity portion declining as they age. This worked for us back then because we only solved for one retirement risk—Sequence Risk.
For the most part, our 65-year-old retiree was not anticipated to live much longer than a decade or two past retirement, so focusing on sequence risk made the most sense.
The Effect of Inflation if We Live Longer
The Federal Reserve has established a target inflation rate of 2%. It is important to note that this does not mean the Fed is pursuing a zero-inflation policy. This intentional target, designed to maintain economic stability, creates a fundamental challenge for retirement planning which merits deeper examination.
Our analysis focuses specifically on how this targeted inflation rate affects retirees over extended time horizons, as increasing longevity pushes retirement periods to 40 or 50 years.
This research addresses a critical question facing the financial services industry. How does the Federal Reserve's 2% inflation target affect retirement resources when retirement spans four or five decades?
Understanding the magnitude of this impact proves essential for financial professionals who must develop strategies to maintain their clients' purchasing power throughout these extended retirement periods. The compounding effect of even this modest inflation target over such lengthy periods may reshape how we approach retirement planning.
Grande or Venti?
Imagine your client is a big Starbucks fan who has just retired. You are asked to create a fixed budget for Grande lattes. Let us assume the current price is $4.45, so you budget $1,624 per year for your client’s daily Venti latte habit.
However, as time passes, the Fed’s target 2% inflation begins to affect the price of their latte and the purchasing power of your fixed coffee budget. Let us see how this plays out over time:
- Year 1: Their $1,624 buys them 365 lattes, one for every day of the year.
- Year 10: Their budget now only buys 298 lattes. They must go without their latte for 67 days of the year.
- Year 20: They can now afford 244 lattes, missing out for 121 days, or about four months of the year.
- Year 30: Their budget stretches to just 199 lattes. They will be without their daily latte for 166 days, nearly half the year.
- Year 40: They can only buy 163 lattes, going without for 202 days, more than half the year.
- Year 50: Their initial budget now only buys 133 lattes, so they will have their Starbucks fix for just over one-third of the year.
Source: Dunham & Associates Investment Counsel, Inc., 2025
This illustrates how inflation steadily erodes your purchasing power over time. Even though their coffee budget had stayed the same, what started as a daily treat became an occasional luxury as the years passed.
The same holds true for any fixed-income payment the retiree receives over time. Inflation may be a smaller factor with shorter life spans but may become significant if retirees live much longer.
Living Longer, Eating More
Modern retirement planning requires the industry to shift its thinking and challenge long-held assumptions to address evolving realities. As mentioned, the two powerful forces driving this transformation are increased human longevity and persistent inflation.
To illustrate the size of this change in thinking, our analysis now focuses on food costs, the single essential expense category without which we do not need to worry about longevity and, for that matter, inflation.
We examined this one basic living expense through the lens of extended lifespans and cumulative inflation. It is a compelling example of why traditional retirement planning approaches may no longer suffice for modern retirees facing decades of inflation across all expense categories while potentially living well into their nineties or beyond.
We started by understanding how much of our disposable income is spent on food. According to the USDA, in 2023, we spend, on average, 11.2% of our disposable income on food.(2) In my case, I am sure it is significantly more!
In their analysis, the USDA noted that total food spending remained constant at 11.2% of disposable income in both 2022 and 2023. What did change was food-at-home spending decreased from 5.6% in 2022 to 5.3% in 2023, reflecting a shift away from home food preparation
Food-away-from-home spending increased from 5.6% of disposable income in 2022 to 5.9% in 2023. This reached a historic high since tracking began and continues the upward trend of the pre-pandemic.
Source: USDA, 2023
Based on USDA data, a retiree with $100,000 in disposable income will spend $11,200 a year on food ($100,000 x 11.2% = $11,200).
Next, we want to examine the impact of inflation on this food expense. According to the USDA, food inflation has averaged 3.26% yearly over the last 50 years, from 1974 to 2023. (3)
During the last 50 years, inflation varied widely. It included the high inflation of 1974 to 1981, which saw consistently high food inflation, often above 6%, a moderation period from 1982 to 2019, which saw generally lower and more stable inflation rates, and the recent volatility from COVID-19 from 2020 until the end of 2023, which saw a sharp increase in food inflation.
The red dashed line in the chart below shows the long-term average of 3.266% with three notable spikes. 1974 was the highest, at 14.3%, followed by 1979, at 11.0%, and, more recently, 2022, at 9.9%.
Source: USDA, 2023
Eating Your Assets
Using the historical Food Consumer Price Index data from 1974-2023 of 3.266%, assuming a disposable income of $100,000 and following the current U.S. consumer spending pattern, this retiree allocates $11,200 of their income to food. This includes daily eating, such as breakfast, lunch, and dinner at home, occasional eating out, and maybe a relaxing glass of wine daily.
This initial allocation appears manageable, yet the compound effect of food inflation creates a startling progression:
Source: Dunham & Associates Investment Counsel, Inc., 2023
Within 20 years, annual food costs climbed to $20,626, consuming 20.6% of the initial income. By this point, the retiree had spent $309,225 on food alone. In standard current-day planning, this can be successfully planned assuming the client passes away in the mid-to-late eighties.
However, the true impact of inflation becomes more pronounced in later years, highlighting our concern about longevity paired with inflation. After 30 years, annual food expenses reach $28,443, requiring 28.4% of the original $100,000 income, and they would have eaten $556,410 of their assets.
This progression continues, with food costs surging to $54,091 annually by year 50, demanding 54.1% of the $100,000 initial income. The cumulative impact is over $1.36 million of assets they would have eaten.
We view this as a blind spot in traditional retirement planning, as we do not allocate enough growth.
It is significant that food costs alone could consume over half of a retiree's initial disposable income after 50 years and that they would have eaten over $1.3 million.
And if the client wanted to feed their spouse, they would have eaten over an estimated $2.7 million of assets combined.
Source: USDA, 2023
Moderate, Yet Concerning
We were curious to see if the numbers drastically changed if we exclude periods of extreme inflation like 1978-1981 and 2020-2023. This allowed us to examine food costs using a more modest average inflation rate of 2.718%.
Not surprising to us, the impact on retirement resources is still concerning.
The progression is less dramatic but still worrying, starting with the same $100,000 of disposable income and $11,200 allocated for food.
After 20 years, annual food costs rise to $18,642, consuming 18.6% of the initial income, with cumulative food expenses reaching $292,462.
By year 30, the annual food cost grows to $24,376, requiring 24.4% of the original income.
The 40-year mark sees annual food expenses reach $31,874, consuming 31.9% of initial income, with cumulative costs of $792,499.
At 50 years, even under this more moderate inflation scenario, annual food costs reach $41,677, requiring 41.7% of the initial income, with total food expenditures estimated to surpass $1.16 million.
Feed your spouse, and you eat over an estimated $2.3 million in assets.
Source: Dunham & Associates Investment Counsel, Inc., 2025
This "better case" scenario, excluding periods of high inflation, still presents a fundamental challenge to traditional retirement planning. While the result is less severe than our earlier analysis, it is still significant.
This underscores our point that even in a more favorable inflation environment, increased longevity and persistent inflation demand new retirement planning approaches beyond traditional investment strategies.
Click here for full white paper.
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.