‘You just lost 8.6% of your retirement savings.’ A prominent economist and best-selling author on exactly how much inflation could be eating into your savings

Inflation stubbornly remains at a 40-year high, with the latest numbers showing that the U.S. inflation rate hit 8.6% in May, compared to a year ago. Meanwhile, in general, savings accounts are paying low rates (though you can see some banks like these are now paying 1.25% or more on savings). And that begs the question: How quickly will inflation eat into your savings — and should you even be saving at all?  We asked a prominent economics professor and two other money pros to address this.

One simple way to think about the roughly 8% inflation rate is this: “In simplified terms, some goods and services that were previously $100 now cost $108. This means that any uninvested cash could be losing value quickly if it’s just sitting at home or in an account that doesn’t pay interest,” says Chanelle Bessette, banking expert at NerdWallet. While that might imply you don’t need savings at all, pros say you should aim for 3-6 months of expenses in savings — even in periods of high inflation. Ultimately, it’s about being able to afford your essential expenses like housing and food in the event of a job loss or another emergency.  

Another way to think about what inflation is doing to your money is this: “If you’re, say, 60, and have safely invested all your savings in cash and bonds, you just lost 8.6% of your retirement savings in real terms over the past 12 months. If you have a fixed dollar pension, its real value each year for the rest of your life just fell by 8.6% over the past 12 months,” says Boston University economics professor Laurence Kotlikoff, author of Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life, and creator of the fintech site Maxifi. 

What’s more, he says with the market declines we’re seeing this year, many retirees have been zapped. “For many households, [withdrawing from] their retirement accounts starting at retirement so they can defer taking Social Security retirement benefits until 70 is a no-brainer. But that’s the exact opposite advice provided by Wall Street, which wants you to hold onto your accounts so they can charge you fees,” says Kotlikoff. You can see the highest interest rates you might get on a savings account here.

And still another way to think, roughly, about inflation and its impact on savings is to consider the rule of 72 — an easy formula that is used to give a very rough estimate of how long it would take to double your investment. “For the rule of 72, divide 72 by the percentage your account earns to get the number of years it will take for your money to double,” says certified financial planner Justin Pritchard of Approach Financial. If inflation was at 7.2% for 10 years, prices would double over that 10-year period because 7.2 times 10 is 72. “Any two numbers can work and you can flip-flop the numbers as well, so 10% inflation for 7.2 years would also double prices,” says Pritchard. 

Of course, nobody can predict how high inflation will be in the coming years or how long inflation will remain high. “The reality is that inflation will rise or fall over the coming years, so you can only make rough estimates with the rule of 72,” says Pritchard.

Unfortunately, many Americans are already feeling the pain of inflation on their savings. “Due to high inflation and other financial burdens, more side hustlers are working a side job just to make ends meet. Instead of using this income to boost savings, knock out debt or pay for a vacation, there has been a big increase in people who simply need these funds just to pay for everyday living expenses,” says Ted Rossman, senior industry analyst at Bankrate. Thus, the lack of ability to sock away savings at a usual rate means that not only are Americans unable to contribute to building up their savings, they’re also bound to experience a decrease in their purchasing power of the savings they do have.