Inflation Can Devastate Even a Good Retirement Plan

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"Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair."
-Sam Ewing

"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man."
-Ronald Reagan

"Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career." -Bill Vaughn

"Inflation is taxation without legislation." -Milton Friedman

"Bankers know that history is inflationary and that money is the last thing a wise man will hoard." -William Durant

"Inflation is the crabgrass in your savings." -Robert Orben

"Inflation is when sitting on your nest egg doesn’t give you anything to crow about." -Unknown

Despite these witty quotations, no one could say it strongly enough – when living on a fixed income, inflation has a profound impact on your quality of life.

The Fourth Edition of the American Heritage Dictionary of the English Language defines inflation as, "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services." Basically, inflation makes goods and services more expensive and decreases the value of your money.

When you are working – your wages generally rise as the costs of goods and services increase. Your earnings "keep pace with inflation", so normal inflation is not generally a big concern. However, when you are living off of savings – inflation literally robs you of income.

Most people underestimate the impact inflation will have on their retirement plans. Even at relatively low rates, inflation is a real thief of buying power over time. Most experts feel safe recommending that individuals calculate their retirement needs using a 3 percent inflation rate. But, it is important to understand that we have seen (as in the late seventies and early eighties) sustained inflation rates of around 10 percent!

The Math

Failing to account for the effects of inflation is a very damaging mistake. Perhaps the following example will help you understand the real world implications of inflation. These scenarios assume that you now require $35,000 a year to maintain your lifestyle and would like to maintain that standard of living in retirement. A 3 percent inflation rate is used -- the historic average (neither low nor high):
  • If you need $35,000 a year to live now, you will need $47,037 a year in 10 years to support the same standard of living.
  • $63,214 a year is the amount of money you would require in 20 years (age 85 if you retired at 65).
  • And, if you retired at 65 and lived to be 99 years old – another 34 years, you will need $95,617 a year!

If we adjusted the inflation rate upward just 1 point to 4 percent, then the $63,214 required to support you at 85 becomes $76,689 – a rather significant increase.

The math is even more staggering when supporting a $60,000 a year lifestyle. At just a 3 percent inflation rate you will need the following amounts to support the same expenses:
  • $80,635 a year in 10 years.
  • $120,000 a year in 20 years.
  • $163,914 in 34 years (If you retire at 65 and live to 99, you have lived 34 years in retirement.)

The good news is that Social Security and some pension programs (though increasingly few) adjust your income for inflation. The bad news is that if you are living in retirement by withdrawing from investments or savings, then the value of your money will dramatically decrease overtime. You will require far more money to support your lifestyle in the future.

Explore how annuities can help protect you from inflation. You may also want to use the NewRetirement Retirement Calculator. This tool enables you to input different inflation rates and see their impact on your Retirement Plan.

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