A Nerdy Retirement Income Thought Experiment

(You don’t need this. I just enjoy it.)

This is a more advanced post than most people need. If you’re early in your career, still figuring out basic saving habits, or just trying to get your financial feet under you, feel free to skip it entirely. Nothing here is required to live a good financial life.

I’m writing this one for fun—for the people who enjoy peeking under the hood of retirement income planning and asking, “Wait… are we modeling this correctly?”

Because there’s something odd hiding in plain sight.

We Got Smarter About Returns—and Stopped Halfway

About thirty years ago, financial planning took an important leap forward. We stopped pretending investment returns were smooth, predictable, straight-line numbers and started treating them as uncertain. We embraced historical simulations and Monte Carlo analysis. We acknowledged sequence-of-returns risk and its impact on retirement sustainability.

But somehow, inflation never came along for the ride.

In most financial planning software today, investment returns vary wildly across thousands of simulated futures. Markets crash early in some scenarios, boom in others, meander unpredictably in most. Meanwhile, inflation marches forward like a metronome—identical every month, every year, in every scenario.

The result is a strange analytical creature: investments are risky and uncertain, but inflation is treated as known and risk-free.

That should bother financial planners more than it does.

Inflation Isn’t a Constant—It’s a Sequence

Inflation doesn’t just “exist.” It arrives in patterns. And the order of those patterns matters.

High inflation early in retirement is very different from high inflation late in retirement. The same average rate can produce very different outcomes depending on when it shows up. That’s especially true for retirees drawing from portfolios or relying on income streams that don’t adjust with inflation.

Treating inflation as a single fixed number ignores this reality. It collapses a wide range of possible futures into one tidy—but misleading—answer. And when plans are sensitive to inflation, that simplification can quietly overstate how much someone can safely spend.

A Simple Example Shows the Problem

Imagine a retiree living on a fixed pension that never increases. No portfolio risk. No fancy asset allocation. Just steady nominal income and the slow erosion of purchasing power.

If you assume inflation will be a stable 3% forever, you can calculate exactly how much they should spend and save each month to maintain purchasing power over a 30-year retirement.

It's clean. It's elegant. It makes us feel comfortably in control.

But history doesn’t behave that way.

Real inflation has bounced from deflation to double digits within a single lifetime. When you replay that same retirement across historical inflation sequences, the “safe” spending level varies dramatically depending on when retirement begins. Some sequences work beautifully. Others fail badly—even though the long-term average inflation looks reasonable.

That variability is risk. Not because inflation exists, but because it refuses to behave.

“Just Assume Higher Inflation” Isn’t the Fix

A common workaround is to simply plug in a higher constant inflation rate. If inflation is risky, just be conservative, right?

The problem is that this approach produces one answer, not a range of choices. It also requires inflation assumptions that feel implausibly high to approximate the protection that variability actually provides. You end up with numbers that are technically defensible but psychologically awkward and practically unhelpful.

This is exactly why we stopped using straight-line returns for portfolios. It hides tradeoffs. It removes choice. It obscures risk rather than illuminating it.

Inflation Risk Interacts With Investment Risk

Once portfolios enter the picture, things get more nuanced.

In stock-heavy portfolios, variable returns can sometimes absorb inflation shocks. In bond-heavy or low-return portfolios, inflation hits harder. Plans targeting high probabilities of success are also more sensitive to inflation variability than plans that accept more risk.

The takeaway isn’t that inflation always dominates the analysis. It’s that sometimes it matters a lot, and fixed inflation assumptions can understate risk precisely when retirees are trying to be careful.

That’s not a comforting error.

Why This Matters (Even If You Never Run a Simulation)

Risk management isn’t about predicting the future. It’s about understanding how wrong the future might be—and what that wrongness could cost you.

Inflation is uncertain. We know actual outcomes will differ from neat assumptions. When those differences matter—and in some plans they matter enormously—our models should reflect that reality.

This doesn’t mean every plan needs cutting-edge analytics or hyper-complex assumptions. It does mean we should be humble about what our tools can and can’t see. When inflation is oversimplified, spending capacity is often overstated and risk understated.

And that’s the exact opposite of what good planning is supposed to do.

The Point of the Exercise

Again, most people don’t need to worry about any of this. Saving consistently, spending intentionally, and thinking strategically will get you most of the way there.

But for those of us who enjoy the mechanics—the why behind the recommendations—this is a reminder that retirement income planning is still evolving. We solved one hard problem and quietly left another unfinished.

Inflation isn’t fixed. It isn’t predictable.And when we pretend it is, our confidence can exceed our certainty.