Inflation disintegrates the value of money. The same item or service you buy today, may double or triple in price due to inflation, and this vastly decreases your purchasing power. In 1960 a gallon of regular gas cost $0.31, a gallon of milk was $0.49, and a first-class postage stamp was $0.04. Fast forward to 2010 when a gallon of regular gas cost $2.70, a gallon of milk was $3.40, and a first-class postage stamp was $0.44. Simply put, due to inflation, the dollar you have in your pocket today, will not buy as much ten years in the future.
Inflation can be the silent killer in a retirement account because it has the potential to erode your savings over time. The fact that inflation has been relatively low in recent months and years has masked how inflation can reduce an investor’s long-term purchasing power.
This “silent killer’s” fluctuations are not tracked in the media as mutual funds or stock and bond prices are, so inflation is referred to as the high blood pressure of the financial world. Just as you can live for years with high blood pressure and not know its devastation until you suffer the consequences, inflation can decrease the purchasing power of your money without you knowing you are at risk.
Even though the small percentage increases in inflation you hear about during the news at any one time may seem minor if you consider its impact on one dollar – Ex. 3% inflation is only 3 more cents on the dollar – this is magnified over the course of decades.
The best way to fight back against inflation is to always consider an inflation factor when calculating your future income needs. As an example, if you currently live on $50,000/year today and plan to retire in 10 years, make sure you factor in at least a 3-4% cost of living adjustment on the income you need to account for inflation.
If you have any questions on how to set up your retirement savings plan to account for inflation, please give us a call. We’re here to help!