Plan for Inflation
Inflation is taxation without legislation.
— Milton Friedman, Nobel Laureate in Economics
A typical 65-year old baby boomer couple has a joint life of 30 years, meaning there is a high probability that at least one of them is going to live to age 95. And 30 years is a very long time to plan for. Think of your own life and where you were 30 years ago and all that has happened since…changes in career, family, where you live and how. Think what it may mean to spend a similar amount of time in retirement.
Many of us do a pretty good job saving and investing for retirement, but we can overlook one of the great dangers to a secure retirement — inflation. Historically, inflation has averaged around 3%. Doesn’t sound like much, but over time, the impact can be substantial. A 3% inflation rate means that $1 this year will be worth 97 cents next year. In 10 years, $1 will be worth 73 cents. In 20 years, $1 will be worth just 50 cents. In 30 years, $1 will be worth just 41 cents. This means today’s $100,000 in the bank could be worth just $41,000 30 years from now.
If your nest egg isn’t keeping up with inflation, your money is disappearing without you even realizing it! And while inflation Is cutting your purchasing power, it is also making many things more expensive. Think of a bottle of coke that used to cost 75 cents 30 years ago and is now more than $1.50. Or a gallon of milk that was $2.50 and is now $3.50. And prices of some things such as education, healthcare and housing have actually increased significantly faster than the overall rate of inflation.
The corrosive impact of inflation is one of the primary reasons we invest. While yearby-year inflation eats away at all we’ve earned and saved, stock markets, offer us significant opportunities to grow our wealth.
