Inflation Risk in Retirement — Prices Gnawing at Retirement Funds

Many people plan to withdraw "a set amount each month" in retirement. For example, deciding to spend 2 million KRW a month. Because the amount is fixed, it looks stable.

But there's a trap. Prices rise every year, but if the amount you withdraw stays the same, the amount you can actually buy (purchasing power) shrinks year by year. You can't live today on 2 million KRW the life you led on 2 million KRW 20 years ago. Even if the nominal amount is the same, the "real value" keeps shrinking.

Because retirement lasts 20-30 years, this small price increase piles up over a long time and greatly lowers your standard of living in the later part of retirement.

There's a simple way to calculate just how scary inflation is: the "Rule of 72." Divide 72 by the inflation rate, and you get the number of years it takes for money's purchasing power to halve.

Let's say prices rise 3% a year. 72 ÷ 3 = 24. That is, in 24 years the purchasing power of today's money halves. It means the value of 100 million KRW today is worth only 50 million KRW twenty-four years from now.

With higher inflation, it's much faster. If inflation is around 8%, as in the U.S. in 2022, 72 ÷ 8 = 9—purchasing power halves in just 9 years. This is why inflation is called a "silent thief."

You might think, "Surely it won't rise that much?" Looking at Korea's actual prices over the past 50 years gives you a sense.

A bowl of jjajangmyeon rose from 100 KRW in 1970 to around 5,000 KRW by about 2020, roughly 50 times (per a Korea Consumer Agency survey, about 7,069 KRW on average in Seoul in 2023); a pack of ramen went from 20 KRW in 1970 to about 596 KRW, roughly 30 times; and the city-bus fare went from 10 KRW in 1970 to around 1,200 KRW, roughly 120 times.

The increase differs by item, but the common point is clear: after decades, what you can buy with the same money shrinks greatly. For reference, Korea's annual consumer price inflation in 2024 was 2.3%. It looks small each year, but piled up over 30 years of retirement it's by no means negligible.

There are broadly two paths to protect retirement funds from inflation.

First, "inflation-linked withdrawal." This is a method of raising the amount you withdraw each year by however much prices rose. The 4% rule itself is originally premised on "increasing the first year's withdrawal by inflation each subsequent year." This maintains your real purchasing power, but because assets deplete faster accordingly, you must set the withdrawal rate conservatively.

Second, holding some assets that tend to rise with prices. Real assets like stocks and real estate tend to reflect price increases over the long run. However, you must always remember together that such assets come with large declines (maximum drawdown) and long recovery periods. Since you're taking on risk to defend against inflation, the principle is to hold them only within a range where you can endure the drawdown.