When was the last time you heard anyone talk about inflation? Probably in 2015 when the New England Patriots won the Super Bowl using underinflated footballs -- no doubt a more popular topic than price inflation.

But price inflation does deserve attention from aspiring retirees, even if inflation rates haven't been extreme in almost 40 years. The highest inflation has been in the last 10 years was 3%, and it's remained below 2% since 2018. Over longer periods of time, inflation averages 3%.

Inflated dollar bill.

Image Source: Getty Images.

Even at low rates, inflation is impacting your long-term wealth-building plan. Year to year, that impact might not be noticeable. But over several decades, you will see your buying power decline. Remember the 1980s, when you could buy a dozen eggs for $0.71? Now, 30 years later, you'll pay $1.41. And you can bet they'll cost much more in 2049.

How inflation impacts your wealth before retirement

A quick review of inflation mechanics might change the way you think about your cash deposits. Say you put $1,000 in a savings account on Jan. 1. And those funds are earning 2.05% -- a competitive rate for cash savings. After a year, your balance including the taxable interest earnings is $1,020.50. If your effective tax rate is 24%, you'll pay $4.92 in taxes and keep $1,015.58.

With inflation of 2% in the same time period, you'd need $1,020 at year-end to match the buying power you had on January 1. But in our scenario, you've only got $1,015.58. That means you lost $4.42 in buying power, despite the low inflation rate and high interest rate. The math looks much worse if you're storing cash in a traditional savings account, for which the average interest rate is 0.09%.

How inflation impacts your wealth after retirement

The inflation impact will be even more obvious after you retire. At that point, you'll be taking fixed distributions from your retirement accounts to cover your living expenses. As prices rise, your fixed income will be strained. Eventually, you'll have to increase your distributions to make ends meet.

Retirement planning experts recommend you follow the 4% rule for retirement withdrawals, partly because it accounts for modest inflation rates. Using the 4% rule, you'd withdraw 4% of your retirement savings in the first year for living expenses. In future years, you can increase that 4% to keep pace with inflation. Assuming you have your money invested, the 4% rule should stretch your savings for 30 years or more. 

The 4% rule makes many assumptions, however. The first notable assumption involves Required Minimum Distributions or RMDs. These are the minimum distributions, mandated by the Internal Revenue Service, that you must take from your IRA or 401(k) starting at age 70 1/2. It's likely the mandated distribution amount will exceed 4%. You can't skip RMDs without facing tax penalties, so you have to follow the IRS' demands and increase your withdrawals. The higher withdrawal rate puts more pressure on your portfolio and makes it more sensitive to other factors like inflation.  

A second notable assumption has to do with inflation. The rule is less reliable if inflation spikes outside of historical norms. Consumer Reports estimates that if inflation rises to 4% and you are following the 4% rule,  you have a 50% chance of running out of money in retirement.

How to protect your wealth against inflation today

Even in this era of low inflation, taking steps now to protect yourself only increases your financial flexibility in the future. Here are six strategies you can implement.

  1. Take full advantage of company-match contributions. If you participate in a 401(k), your employer might offer matching contributions. Find out what contribution level gives you the maximum company match. Then raise your contributions accordingly. Also, pay attention to the vesting rules. Often, you'll need to keep your job for three to five years to get full ownership of those company-funded deposits.
  2. Don't sit on cash. Your cash savings should be your emergency fund only, kept in a high-rate account that earns 1% to 2%. Normally, you'll want the emergency fund balance to support three to six months of living expenses. All other savings should be invested within a tax-advantaged retirement plan or a taxable brokerage account.
  3. Use your tax-advantaged retirement accounts. Don't save for retirement in a taxable brokerage account until you've maxed out your contributions in your 401(k) and IRA. Investments in 401(k)s and IRAs grow tax-free. Take advantage of that perk for maximum earnings growth.
  4. Consider a health savings account, or HSA. Inflation doesn't hit all prices equally. A big concern for future retirees is the inflation of healthcare costs, which has been running higher than the overall inflation rate. You can hedge against those rising costs by investing in an HSA. You're only eligible for an HSA if you have a high-deductible health plan. HSAs have three tax benefits, which will lower your costs. Contributions are tax-deductible, investments grow without tax implications, and qualified distributions for healthcare are also tax-free.
  5. Invest for the long term. Invest your retirement savings in low-cost mutual funds or index funds, where your long-term earnings should outpace inflation. The stock market does rise and fall from year to year, but don't let that scare you away. Long term, the S&P 500 averages 7% annual growth, and that's after adjusting for inflation.
  6. Know about inflation-protected funds. Inflation-protected mutual funds give you access to bonds that pay higher interest rates when inflation rises and lower rates when inflation dips. These funds will generally provide a lower overall return than equity funds, but they could play a role in a diversified portfolio when inflation starts heating up.

Today: Save more, invest more

To protect your retirement plan from getting upset by inflation, maximize the earnings on your cash and keep your long-term savings invested. Making the right choices now sets you up for financial freedom in retirement -- and that's a bigger win than even the Super Bowl.