Thinking about inflation should be a big part of your retirement planning. You will need to understand inflation and the effect that it could have on your savings before you retire. Keep in mind that you have no control over inflation and that it’s possibly the most serious risk there is to your future financial security.
What inflation means to consumers is that what costs a dollar today will cost half again or two times as much in the future, depending on rates of increase. The bottom line is that your money will be worth less in the future than it’s worth today. This means that, as times passes, you will need more money to support yourself at the same level that you enjoy today.
While you’ve been working, you probably won’t have noticed inflation. You probably got yearly increments in your salary which camouflaged inflation. But as soon as you retire and are living on a fixed income – believe me – you’ll notice it! When thinking about retirement planning investment don’t forget to take inflation into account. A failure to do so could mean future financial doom!
You may ask “How Can I Predict Inflation?” You can’t. You can only make an educated guess. If you were to ask a retirement planner, he or she would most likely quote you an inflation rate of 3% because that’s the rate that’s been going on for the past 20 or 30 years. But looking at today’s unstable economy, it’s probably smarter to look back to the 1970s. In the 70s, prices doubled in ten years. What that signifies is that a 1970s dollar was worth 50 cents by 1980.
The 2008 credit crisis have made future inflation particularly hard to predict. The economic outlook has additionally become extremely rocky due to other things such as the huge numbers of Baby Boomers going into retirement, the unpredictability of the future of Social Security, and recent bank and financial institution bailouts.
So, Can I Afford to Retire?
A good place to start retirement planning is to find a free financial retirement calculator online. Apply a variety of inflation rates and you’ll get a variety of possibilities. Don’t use the lowest rate of inflation. This will cause you to underestimate how much you need to retire.
Even using a 3% rate of inflation, which is what most planners use, 24 years is all that it will take for the cost of living to double. This means that in 24 years you’ll need two bucks to buy what you could buy for a dollar today. So think how bad it could be for someone who figures how much they’ll need to retire using a 3% rate of inflation if the rate of inflation turns out to be more like 5% or 6%. Take this into consideration when calculating how much you’ll need to have to retire.
If you user higher inflation estimates, perhaps you’ll save too much. That’s not a bad thing. Big savings will keep you financially comfortable. And if worse comes to worse, you’ll be leaving your heirs a healthy inheritance!
Consider Inflation When Investing
Another way to secure retirement planning that minimizes the risk of inflation is to find investments that will grow as time passes. It was common, in the past, to invest in growth stocks until the time of retirement and to then switch to bonds that were more stable but had lower returns. This strategy has become chancy since the market declines of 2000 and 2008.
Investing in rental real estate – either for appreciation or for the income from the rental – or in Treasury Inflation Protection Securities (TIPS), specialized securities that adjust as inflation adjusts, are alternatives to investing in stocks. No matter what you decide to do, you should think carefully before you do it.
Wondering “When can I retire?” Well, the truth is, that if you don’t plan for an adequate amount of inflation, the purchasing power of your savings is going to be dramatically reduced. If you retire when you’re 65, you may have 30 or 40 years to live on your retirement savings. You should plan on the buying power of those savings to be cut in half at least once, and maybe twice during those years.
As unpredictable as inflation may be, one can predict that it will rise in the future and take a bite out of people’s savings. That can take a toll on your future security. Make sure you take some very valuable time to factor inflation into your retirement planning. This will not only make your future secure, but the future of your family secure as well.
About the author: Mark T. Harris lives in Nevada with his wife and two grown children. He spends time traveling and surfing the Internet, when not just enjoying his money! Mark speaks about retirement planning and wealth building.
