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How High Inflation Impacts Your FIRE Journey (And How You Can Beat It)

What is the silent killer of financial independence? That’s right - inflation. There is no denying that everything is becoming more and more expensive, with expenses eating into your savings for early retirement, and inflation is the culprit.

The global economy is currently experiencing the highest rates of inflation since the 70s and 80s. This will have a big impact on everyone’s FIRE journey, and it’s important for anyone who is pursuing financial independence to know how to combat its worst effects.

What Is Inflation?

But first, let’s start with the basics. Inflation is a decrease in the purchasing power of money, which leads to a general increase in the price of goods and services.

How Does It Affect Your FIRE Number?

One of the more dire effects of inflation on your financial independence is how it affects your FIRE number. Your FIRE number is just your expected annual retirement expenses multiplied by 25, which is the amount of money you need in your stock portfolio to retire early. The idea is that you can withdraw 4% of your portfolio and never run out of money.

Because this 4% withdrawal rule is based on your annual expenses, that number is going to change as everything becomes more expensive. The fact is that your money will not have the same value in the future. Think back to the 1950s, when a movie ticket in the US cost well below a single dollar.

Over the past 100 years, the stock market has had an annual return of 10%, but inflation has risen by around 3.5% every year (according to the Bureau of Labor & Statistics).

With a 10% annual return rate in the stock market, a 4% withdrawal rate, and a 3.5% inflation rate, that’s 7.5% of your annual return. But these are just averages - inflation can be lower or much higher each year, as is happening at the moment.

Thankfully, you can combat the effects of inflation on your FIRE number. Here are five different ways to combat inflation:

1. Have A Smart Allocation Plan For Your Investment Portfolio

Be very careful with how you invest. Don’t invest heavily in asset classes, like bonds, that don’t keep up with inflation. You should focus on assets that do, such as index funds that track the total stock market or certain sectors of the market which keep up with inflation. Smart investing is the number one way to combat inflation. For more info on asset allocation and how to create a better portfolio, consider signing up for our stock market course for FIRE.

2. Don’t Leave Cash In A Standard Savings Account

This is a good measure even for emergency fund accounts. A lot of people put emergency savings in standard savings accounts, but they don’t have the best interest rate that allows your savings to grow with inflation.

It’s important to do your research on these accounts because inflation will eat away at the money you keep in regular savings accounts. Their 1 or 0.5% interest rates just can’t keep up with inflation.

Consider storing money in accounts like Treasury Inflation-Protected Security accounts that are backed by the government, and are guaranteed to keep pace with high inflation (note: TIPS are made to protect against high inflation, but they can lose their value during years of below-average inflation rates).

Accounts like CDS money market accounts and high-interest savings accounts are also helpful as they give you higher interest rates than a traditional savings account.

3. Be Aware Of Shrink Inflation

Shrink inflation is the sneaky cousin of inflation - with shrink inflation you are paying the same price for goods and services, but you get less of that product or service. Companies use shrink inflation to trick consumers into spending more for less.

Shrink inflation is a direct response to inflation because people are more sensitive to price changes than quantity changes. For example, Coca-Cola moved from selling 2-liter bottles to 1.5-liter bottles for the exact same price. And there are many more examples of companies employing shrink inflation.

There are two ways to avoid buying less product for the same price:

  • Don’t focus on price: This is the main (and sometimes only) thing consumers will focus on. Start paying attention to net weight and quantity.

  • Get rid of brand loyalty: If your usual brand is engaging in shrink inflation, but other brands with the same product are not, accustom yourself to buying products from new companies who aren’t changing product quantity.

4. Secure Stable Housing

As prices rise with inflation, housing will be one of the things that become significantly more expensive - both buying and renting. Owning real estate is one of the most basic but effective ways to combat the effects of inflation.

If you don’t have the money to purchase your own home, you can also invest in REITs. You can learn more about REITs here.

Non-homeowners can also rent in cities with controlled rent ordinances, which prevent landlords from gouging the prices of certain rentals. Staying in one of these rentals will really help renters hedge against inflation.

Inflation doesn’t hit every corner of the real estate market in the same way - being flexible enough to move can also help you avoid inflation if you’re living in a place that is seeing the worst effects of it.

5. Budget, Budget, Budget

It may seem obvious, but the best advice often is. Even once you’ve reached financial independence and retired early, you should still be budgeting.

Budgeting is an excellent way to help you defend against inflation. It allows you to identify areas where you are overspending which usually directly correlates to goods and services being hit hardest by inflation. This way you can cut unnecessary spending.

A lot of people struggle to budget, or downright despise the whole concept of budgeting as it is seen as difficult or restrictive. But the fact is, if you want to achieve financial independence, you have to learn how to budget effectively.

Budgeting helps you to identify the red flags in your spending, which is essential in protecting your FIRE progress during periods of heavy inflation.

Inflation affects everyone, including people who are striving toward FIRE and those who have already achieved it. These tips are just a few ways that you can protect your savings and continue on your journey to financial independence.


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Hello, We’re Amon & Christina

We’re former federal government employees that focused on saving, making, and investing money so that we could grow enough wealth in our investments to never have to work again.

And, guess what? We did it! At the age of 39, we reached financial independence, quit our jobs, and . . . we retired!

So, if you’re interested in learning how to save, make and invest money on the road to financial independence and retiring early (i.e., F.I.R.E.) - this site is for you!

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Our comprehensive course on reaching financial independence and retiring early.

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Everything you need to know about investing in the stock market for financial independence & retiring early (F.I.R.E.)

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