Inflation Is Depleting Retirement Savings: A CPA’s Plan

The Inflation Crisis Seniors Didn’t Plan For

In my 25 years as a CPA and Enrolled Agent, I have never fielded more panicked calls from retired clients than I have in the past 18 months. The question is almost always the same: “Robert, my money is disappearing faster than I expected—what do I do?”

They’re not imagining things. A 2025 Employee Benefit Research Institute survey found that 68% of retirees are withdrawing from savings at a rate that exceeds their original retirement plan. The culprit isn’t reckless spending. It’s inflation—persistent, compounding, and ruthlessly effective at eroding fixed incomes.

Between June 2021 and December 2024, cumulative inflation pushed consumer prices up roughly 20%. Even though the annual rate has moderated to around 2.8%-3.2% in 2025, prices never went back down. The gallon of milk that cost $3.50 in 2020 now costs $4.25. Multiply that across every line item in a retiree’s budget—groceries, utilities, property taxes, prescriptions—and the math becomes alarming.

William Bengen, the financial planner who invented the famous 4% withdrawal rule in 1994, recently called inflation retirees’ “greatest enemy.” He’s right, and I want to walk you through exactly why—and more importantly, what you can do about it before 2026 arrives.

Why the 2.8% Social Security COLA Falls Short

The Social Security Administration announced a 2.8% cost-of-living adjustment (COLA) for 2026. For the average retired worker currently receiving $1,976 per month, that translates to roughly $55 more each month, or about $660 annually.

On paper, 2.8% sounds reasonable. In practice, it doesn’t come close to covering the expenses that matter most to seniors. Here’s the disconnect: the COLA is calculated using the Consumer Price Index for Urban Wage Earners (CPI-W), which tracks spending patterns of working-age households—not retirees. Seniors spend disproportionately more on healthcare and housing, two categories where inflation has been running far above the general rate.

Expense Category	2025 Inflation Rate (Est.)	2026 COLA Coverage (2.8%)	Annual Gap for Avg. Retiree
Healthcare / Prescriptions	7.7%	2.8%	−$1,180
Housing (Rent/Property Tax)	4.9%	2.8%	−$760
Food at Home	3.1%	2.8%	−$85
Utilities (Electric/Gas)	4.2%	2.8%	−$215
Transportation	2.4%	2.8%	+$50
Estimated Total Annual Shortfall			−$2,190

That estimated $2,190 annual shortfall has to come from somewhere—and for most retirees, it comes straight out of savings. As I detailed in my guide on why retirees need 7.7% more for healthcare while COLA falls short, the gap between medical cost inflation and Social Security adjustments has been widening for over a decade.

The 4% Rule Is Under Pressure—Here’s the New Math

Bengen’s 4% rule was groundbreaking in 1994: withdraw 4% of your portfolio in year one of retirement, then adjust that dollar amount for inflation each subsequent year. Historically, this approach survived 30-year periods including recessions and bear markets.

But Bengen himself has acknowledged that the rule assumed average long-term inflation of about 3%. When inflation spikes—and stays elevated as it has since 2021—the annual inflation adjustments compound against your portfolio faster than historical models predicted.

What I see most often in my practice is this: a client who retired in 2020 with $500,000 and planned to withdraw $20,000 per year (4%) is now pulling $23,200 just to maintain the same purchasing power. That’s a 4.64% effective withdrawal rate in just five years. At that pace, portfolio longevity drops from 30 years to roughly 23-25 years, depending on investment returns.

For clients who come to me today, I’m recommending an initial withdrawal rate of 3.3% to 3.5% for anyone expecting a 30-year retirement horizon. For a $500,000 portfolio, that means starting at $16,500-$17,500 per year, not $20,000. The difference is painful—but it’s survivable. Running out of money at 87 is not.

Five Concrete Strategies to Inflation-Proof Your Retirement

The good news is that inflation isn’t unstoppable—not if you act deliberately. Here’s the action plan I walk through with every senior client who sits across my desk:

1. Build a 12-18 month cash reserve in a high-yield savings account. As of June 2025, online banks like Marcus and Ally are still paying 4.0%-4.25% APY. This buffer lets you avoid selling stocks or bonds during a downturn just to cover living expenses. Think of it as buying yourself time.
2. Ladder Treasury I-Bonds and TIPS into your portfolio. Series I Savings Bonds currently pay a composite rate tied directly to CPI inflation (the fixed rate was 1.20% as of May 2025, plus the semiannual inflation adjustment). You can purchase up to $10,000 per person per year at TreasuryDirect.gov. Couples can buy $20,000 combined. TIPS (Treasury Inflation-Protected Securities) serve a similar function inside brokerage accounts and can be held in larger quantities.
3. Maximize the Social Security tax deduction if passed into law. The proposed Social Security tax deduction in the current budget legislation could save qualifying seniors between $800 and $1,500 per year. I’ve written an in-depth breakdown of Social Security tax rules for 2026 that explains exactly how to position yourself.
4. Consider strategic Roth conversions before required minimum distributions (RMDs) begin. If you’re between 62 and 73 and in a lower tax bracket than you expect to be later, converting portions of a traditional IRA to a Roth can lock in today’s tax rates and create a pool of tax-free income. The IRS allows unlimited Roth conversions, but the taxable income created by the conversion must be managed carefully to avoid pushing you into a higher bracket or triggering higher Medicare premiums (IRMAA).
5. Rebalance your portfolio annually with an inflation-conscious allocation. A 70-year-old doesn’t need to be 100% in bonds. I typically recommend a 40/50/10 split: 40% equities (dividend-growth stocks and broad index funds), 50% fixed income (mix of TIPS, I-Bonds, short-term bond funds), and 10% cash/cash equivalents. Equities have historically been the only asset class that consistently outpaces inflation over periods of 10 years or more.

For more investment ideas tailored to retirees, see our guide to 8 high-return, low-risk investments for retirement in 2025.

The Hidden Tax Trap That Makes Inflation Worse

Here’s something most retirees don’t realize until it’s too late: inflation doesn’t just raise your costs—it raises your taxes. This is what tax professionals call “bracket creep,” and for seniors, it’s especially vicious.

When you withdraw more from your IRA or 401(k) to keep up with rising prices, that additional withdrawal is taxable income. If the extra withdrawal pushes your combined income above $25,000 (single) or $32,000 (married filing jointly), you’ll also start paying federal income tax on your Social Security benefits—up to 85% of your benefit can become taxable.

I often tell my clients that inflation hits retirees three times: once at the grocery store, once at the pharmacy, and once on April 15th. The third hit is the one nobody budgets for.

The thresholds for Social Security taxation haven’t been adjusted for inflation since 1993—over 30 years. That means the $32,000 threshold for married couples had the purchasing power of roughly $69,000 in today’s dollars when it was set. Congress has essentially been stealth-taxing more retirees every single year without changing a single line of the tax code. For a deeper dive into what’s changing, read our article on whether your Social Security will be taxed in 2026.

Healthcare: The Inflation Category That Can Break a Retirement Plan

According to Fidelity’s 2025 Retiree Health Care Cost Estimate, an average 65-year-old couple retiring today will need approximately $365,000 to cover healthcare expenses throughout retirement. That figure was $315,000 just three years ago—a 16% increase driven almost entirely by medical inflation.

Medicare Part B premiums rose to $185 per month in 2025 ($2,220 annually per person). Part D premiums, while benefiting from the $2,000 annual out-of-pocket cap introduced by the Inflation Reduction Act, still average $46.50 per month. And Medigap or Medicare Advantage supplemental premiums add another $100-$300 per month depending on your plan and region.

What I recommend to every client approaching 65:

• Compare Medicare Advantage plans during Open Enrollment each fall at Medicare.gov—networks and formularies change annually.
• If you have a high-deductible plan before Medicare eligibility, maximize your HSA contributions ($4,300 single / $8,550 family for 2025, plus a $1,000 catch-up if 55+). HSA funds roll over, grow tax-free, and can be used tax-free for medical expenses in retirement.
• Budget for dental, vision, and hearing separately—Original Medicare still doesn’t cover these, and they can easily add $3,000-$5,000 per year.

A Real-World Case Study: How One Couple Adjusted

Let me share a real (anonymized) example from my practice. Tom and Linda, both 71, retired in 2019 with combined savings of $620,000 and Social Security benefits totaling $3,800 per month. Their original plan called for $2,100 per month in withdrawals from their traditional IRA—a comfortable 4.06% annual rate.

By mid-2024, their monthly expenses had risen by $480 due to higher grocery costs, a property tax increase, and a jump in their Medicare Supplement premium. They were now withdrawing $2,580 per month—a 4.99% rate. At that trajectory, their savings would be exhausted by age 84.

Here’s what we did together:

• Moved $45,000 into a 12-month CD ladder at 4.5% APY to create a cash buffer and reduce the need for market-timed withdrawals.
• Purchased $20,000 in I-Bonds ($10,000 each) to create an inflation-linked reserve for years three and four.
• Converted $28,000 of Linda’s traditional IRA to a Roth IRA during a year when their taxable income was lower, paying about $4,200 in federal tax but creating a future pool of tax-free withdrawals.
• Shifted their equity allocation from 25% to 38%, emphasizing dividend-growth ETFs (Vanguard Dividend Appreciation, Schwab U.S. Dividend Equity) that have historically raised payouts at 6-8% annually—well above inflation.
• Reduced their effective withdrawal rate to 3.6% by trimming discretionary spending by $310 per month, including switching to a less expensive Medicare Advantage plan that still covered their doctors.

Six months later, Tom told me he sleeps better. Their projected portfolio longevity extended to age 92—eight additional years of security from a few deliberate moves.

What to Do Before January 2026

If inflation is depleting retirement savings faster than you planned, the worst response is to do nothing and hope prices stabilize. Hope is not a financial strategy. Here’s a focused checklist for the months ahead:

1. Review your actual withdrawal rate. Pull your last 12 months of bank and brokerage statements. Divide total withdrawals by your portfolio balance at the start of the period. If that number exceeds 4.5%, you need to adjust—now.
2. Run an updated Social Security tax projection. Use IRS Form 1040-ES or work with a tax professional to estimate whether the 2026 COLA increase will push more of your benefit into taxable territory.
3. Check your Medicare plan during Open Enrollment (October 15 – December 7, 2025). Premiums, copays, and drug formularies change every year. A 15-minute review could save $1,000+.
4. Open or fund a high-yield savings account. If you don’t have at least 12 months of expenses in liquid, accessible savings, make that your priority before any investment changes.
5. Schedule a meeting with a CPA or Enrolled Agent. Not a product salesperson—a fiduciary advisor who can model your specific numbers. One planning session can save tens of thousands over a retirement.

The Bottom Line: Inflation Is Manageable—If You Manage It

Inflation is depleting retirement savings across the country, but it doesn’t have to deplete yours. The retirees I see thriving aren’t the ones with the biggest portfolios. They’re the ones who review their numbers every year, adjust when reality changes, and refuse to let inertia do the planning for them.

The 2.8% COLA for 2026 is a start, not a solution. The proposed Social Security tax relief is promising but not guaranteed. What is within your control is how you allocate, withdraw, and protect the money you’ve already saved.

In my experience, the difference between a comfortable retirement and a stressful one rarely comes down to how much money someone had at 65. It comes down to the decisions they made—or didn’t make—at 66, 70, and 75. If you’re reading this, you still have time to make the right ones.