Tuesday, August 3, 2010

The Killer called Inflation

"Inflation is as frightening as a robber and as dangerous as a hit man."

Ronald Reagan - 40th President of the United States

Good retirement planning can be crushed by the unknown... inflation. Recent years have shown benign, if not deflationary figures. However, since 1980, inflation has averaged about 3% per year.

How can this effect your retirement savings? We all know that things will cost more, but here are a few examples assuming annual inflation of 3% per year over 20 years:
  • House - Current: $200,000 Future: $364,424
  • Loaf of bread - Current: $3.00 Future: $4.47
  • Car - Current: $30,000 Future: $54,664

Some of these figures may not thoroughly register. But, let's look at things with a retirement angle. You have to try and keep up with the rate of inflation via your investments. Sitting in a conservative account (ie. money market fund) earning 1% per year, is a sure fire way of failing to reach your retirement plan.

You have to outpace the rate of inflation to stay ahead of the curve. A retiree living on a fixed income of $30,000 cannot sustain spikes or long term increases in inflation. Oil & gas drastically increased a few years ago and then retreated. This effected a number of people, not to mention summer vacation plans. Long term increases will permanently decrease purchasing power AND your lifestyle.

Your retirement income can decrease by 50% if inflation averages 4% over 18 years. Retiring at 60 or 62 sounds good on paper, but unless there's an ample amount of pension money, retirement savings, real estate, etc, to last another 20-30 years, you could be selling yourself short.

Longevity and healthy living is an amazing concept... don't be overly cautious with your retirement investments.

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