Inflation Will Effect Your Retirement

Have you ever thought, “Wow prices sure are going up.” “My money sure doesn’t go as far as it used to.”

What is inflation? Let’s look at a simple example.

I have $100 and I want to buy sparkling water that costs $1 per bottle. So today I could buy 100 bottles. But I decided to wait a year. A year passes. I take my $100 and I go to buy sparkling water. But now instead of getting 100 bottles, my $100 will only buy 96 bottles. What happened? The price of the water increased by 4%, so there was 4% inflation.

What does this mean to you when you are retired? Look at this chart showing annual inflation going back to 1970. 2009 is the only year in the past 50 years that had negative inflation or deflation. Every other year the buying power of a dollar decreased because of inflation.

In the past ten years, inflation has averaged under 2%. In fact, current Federal Reserve policy calls for 2% annual inflation. Just because inflation has been low for several years doesn’t mean it will stay that way. Look at the past. In 1980 inflation was over 13%!

What does this mean to your retirement? The chart shows at 2% inflation the buying power of your retirement income is reduced by one-third over twenty years. At 4% inflation buying power is reduced by one-third in ten years.

You retire today and need $6000 to meet your monthly expenses and to do the things that allow you to enjoy your retirement. At 2% inflation in five years your $6000 will spend like $5434. In ten years you will have lost over a thousand dollars of spending power. So unless you have an additional source of income (from savings and investments), you will find your lifestyle slipping away. You will start cutting back so you can get by on less. You will no longer be able to accomplish your retirement goals.

How do you make sure this doesn’t happen to you?

You pick a path today that you can follow throughout your retirement. You plan today for inflation and for the other things that can knock you off that path so that you know in advance what to do if those things occur. And you put it in writing. You plan today and you put it in writing.