Morningstar has a great piece on the issue of inflation during retirement. Typically, pensions and annuities do not offer inflation protection. So, over time your income declines in real terms.
Even at low rates of inflation, the buying power of today’s dollar will be substantially less in the future. For example, at 2% annual inflation $1,000 will only be “worth” less than $700 in purchasing power.
One solution is to invest money in assets that will (hopefully) produce returns in excess of inflation.
But social security also should maintain some purchasing power (admittedly, it is likely the cost of living adjustment or COLA underestimates many retiree’s real experience with rising inflation).
The article makes a strong case for retirees to consider delaying social security until age 70.
“Effectively, you are buying a very inexpensive inflation-adjusted annuity, and you receive roughly 8% more income for every 12 months that you delay filing past full retirement age. The “cost” is the money needed to pay living expenses while delaying, either from savings or wages from work.” (emphasis added)
Obviously many factors go in to the social security decision but the upside of having the ability to delay may mean a more secure retirement.