A retirement income that stays the same in cash terms falls in real terms every year. Over a period that may last thirty years, the erosion compounds into a reduction that dominates most other risks.
Why the effect compounds
Price increases apply to prices that have already risen, so the loss of purchasing power accelerates rather than accumulating in a straight line.
A modest annual rate that seems tolerable in any single year becomes substantial across decades, halving what a fixed amount buys over a long retirement.
The change is invisible year to year, which is precisely why it is underweighted relative to market falls that arrive suddenly and are widely reported.
Retirement spending has its own pattern
General price measures reflect an average household's purchases, which differ from those of a retired household.
Energy, food and healthcare typically form a larger share of spending in later life, so increases concentrated in those categories affect retirees more than the headline figure suggests.
Housing costs work the other way where a property is owned outright, which is one reason the overall experience varies so widely between households.
Which income sources adjust and which do not
State pensions in many countries are increased annually under a defined formula, though the basis and its generosity differ and are periodically revised.
Some workplace pensions include indexation, sometimes capped, while others pay a fixed amount for life with no adjustment at all.
Income drawn from a portfolio has no automatic adjustment. Increasing it to keep pace requires taking a larger amount, which accelerates depletion.
Why indexation costs so much upfront
Guaranteed income that rises each year requires substantially more capital than a level income, so the starting payment is considerably lower.
This makes the level option look more attractive at the point of decision, when the comparison is between two amounts today rather than across thirty years.
The crossover typically arrives well into retirement, which is why the choice depends heavily on expected duration and on what other indexed income exists.
What holding growth assets is meant to address
Assets whose income and value can rise with prices provide a partial hedge, which is the usual argument for retaining equity exposure well past the retirement date.
The protection is imperfect and not reliable over short periods, since these assets can fall precisely when prices are rising quickly.
Balancing that against sequence risk is the central difficulty of retirement planning, and it depends on circumstances specific enough to warrant individual advice.