It’s one thing to save for retirement, building a nice stable nest egg that will take you through your senior years. And you’ll have Social Security benefits to look forward to, and maybe even a pension and a401K. Establishing a monthly income for yourself is an excellent way to manage your money so you don’t overspend. Knowing what you need to live on each month is an important financial pillar. But it doesn’t end there – there’s one element that blows even the best plans out of the water. The difficult variable of inflation is one of the most crucial factors to consider when it comes to long term financial stability. While just a few cents per month may not appear to be a big problem, over time, rising prices can add up. Over a retirement that lasts for 20 to 30 years, it can end up being a substantial amount of money down the road.
The trouble is, there’s no way to predict inflation. Since the power of the dollar alters with fluctuations in the economy, the overall cost of goods changes slightly each year. Usually costs goes up, but once in a while they goes down. Over the last century the variation of inflation ranged from 1% to 20% per year. That’s a pretty significant range! How to pan for a 20% jump?
The good news is the economy corrects itself, so while some years the percentage rose significantly, on average, between 1913 to 2013, inflation had a 3.22% rise each year. So there’s an estimated benchmark, and while it isn’t a guaranteed number, it’s something you can work with. Using this average inflation rate of 3.22%, your income would have to double roughly every 22 years in order to keep pace with purchasing the same goods and services that you buy today.
Since we live so much longer now, retirement tends to last more than 20 years, which is quite a long time to live without a salary. It also means that the cost of goods and services the year you retire is going to be a lot less than it will be 20 years later. In fact, looking at the data from the paragraph above, every 22 years the cost of living will double. So if you require $5,000 per month to live now, in 22 years that number will be $10,000 per month. That means you’re going to spend twice as much in your later years.
Good investment strategies will help tame inflation’s impact on your lifestyle. Simply keeping money in a savings account isn’t going to cut it – you should really consider ways to make that savings grow. A financial advisor can help come up with a good strategy to make sure you get that money growing in early retirement so that in your later years, you have plenty of cash to live on.