Are you content with your current income? Do you have extra money to spare at the end of the month? Have you given any thought to what your yearly income should be at retirement?
Current Income
No matter how much money we all seem to make, it never seems like it’s enough. There are always bills to pay and unforeseen expenses that pop up. The amount of income we had last year seemed to get us farther than it did this year. Well, this could be the case. All due to a pesky little thing called inflation.
Inflation
If you made $40,000 last year and you did not get a raise coming into this year, but inflation was 3 %, guess what? You actually make 3% less this year than you did last year. Rather than bringing in $40,000, you’re money will only buy you about $38,800 worth of stuff compared to last year.
How Does This Relate to Retirement?
The average inflation rate in the United States is approximately 3.38% (calculated from 1914-2010). That means that each year, our current money is worth 3.38% less than it was the year before (by the way, if you have your money in a CD that’s earning 1.5%, you are actually losing money…).
If our money is effectively worth less each year, that means that it will take more money to continue to live the same lifestyle as yesterday! So how much money will you really need per year for retirement??
Let’s say you will be completely debt-free before your retirement, how much money could you comfortably survive on today? $25,000 per year? $30,000? $40,000? Let’s say you could live a comfortable lifestyle on $30,000 per year, but how much money will that effectively be after 30 years of inflation? Would you believe me if I told you it equates to $81,323.69!!
That’s right! In order to maintain a $30,000 lifestyle 30 years from now, you’ll actually have to spend $81,323.69! Make sure to factor in inflation when you’re planning that retirement date!
For the rest of you that are wondering about a different value of money or a different time frame, here’s a table below that might help you out!
Inflation is a killer for those on fixed incomes. Something that I’m giving more and more thoughts to these days. Good post.
Yep. Inflation can really be a problem for those that don’t consider it in their retirement plans.
We haven’t had a raise in 5 or 6 years because our business is so slow. My boss could have let several of us go (there are only 14 of us) but he chooses to keep everyone. Can’t justify asking for more money when I only work about 2 of the 8 hours than I’m there! And it’s that way for everyone.
We are all in our mid 50S or older, so I think he’s just trying to get us all to retirement age.
I do worry about the inflation. I work a second job.
It’s too bad that your work is so slow, but you must have a really caring boss to keep you all employed. Do the best to invest your savings for the future and watch out for that inflation!
Inflation is a killer and i’m not looking forward to having to deal with it. The worst part about it is that it screws the people who were ready for a disaster (those with large savings accounts now) from the real estate bubble.
now all their savings will buy less stuff, so they have less incentive to save in the future.
Jeff @ Sustainable life blog recently posted..Changing Strategy
Honestly, I didn’t really think inflation would have as large of an impact as it does! If my wife and I want to live a $50,000 lifestyle when we retire, we’ll actually have to take out $188,987 per year (40 years from now)! A million dollars wouldn’t last too long with that scenario….
It’s important for people to factor inflation into their retirement calculations, but I suspect that too few actually do. It can create misleading data and conclusions otherwise.
For example, if you project that you’ll earn 8% annually on your investments, you might assume a certain lifestyle later based on that. However, if inflation is 3.5% annually during that time, your real purchasing power has increased by about 4.5% (for purpsoses of example).
Inflation is real, it’s present, and has been sky high at different points in time. Best not to ignore it!
Squirrelers recently posted..The “Right Thing to Do” – Plus Updates- Top Referrers
If people didn’t factor in the inflation, they’d be left with hardly any money at retirement! $10,000 may have seemed like a ton of money 50 years ago, but today, that might last you 2 years…
One way to counter inflation for retirement is investing in growth stocks/funds. This is one of the shortcomings to investing in bonds because it does not keep up with inflation. In my case, some of my income for retirement will be indexed to CPI, although it is inaccurate relative to real inflation. This one of many reasons to have multiple income streams.
krantcents recently posted..Is Networking Over for Job Seekers
That is definitely one way. Thanks for the input krantcents!
I’m really afraid of inflation as well. If I retire early, a high inflation will kill my saving and investments.
That’s why I’m trying to move more money to rental properties because the rental income will keep up with inflation.
retirebyforty recently posted..Yakezie Blog Swap 7
Real estate is one way to battle inflation for sure! In fact, I think this may be my next article!
They used to say that 1 million was a lot of money. Not anymore. I have been fortunate to get cost of living raises the last couple years but I can’t say that I am confident in them continuing.
We are pretty avid with our retirement savings and we do factor in inflation so I am hoping we will be ok.
Miss T @ Prairie EcoThrifter recently posted..The ABC’s of Debt Reduction
Let me tell you that you are one of the few. Thanks to your concern for your future retirement funds, I’m sure you will be just fine! Plus, you have your awesome website which will be a nice income source in the future!
I’ve worried about the exact same thing in the last few months. The fact is that my purchasing power has dropped largely due to my country’s forex dip against major currencies, and this has hiked inflation quite a bit.
In addition, GST will be officially introduced next year! Being on a fixed income is definitely looking really gloomy now.
That’s why I’ve been more diligent scouting out new passive income channels including a variety of investment strategies to curb inflation from shrinking my retirement nest!
B Kelly recently posted..Buy-And-Sell Property or Buy-And Hold Property
Inflation is very real, and it honestly should make you a little nervous! But, those fears will cause you to prepare yourself for it, much like you are already doing with your passive income channels! Great job!
The historical inflation rate is no guarantee of future inflation either. The period from retirement to death (say 30 years) may experience higher than average inflation, putting even more pressure on your lifestyle. It is definitely prudent to plan on a conservative (high) inflation rate when projecting future cash flows.
Hunter recently posted..Know Before You Owe
You’re right Hunter. There’s no guarantee that inflation will continue to happen, but we’ve seen it year in and year out for about 100 years now. If I were you, I’d count on it (and it sounds like you are, so good job!).
Stinkin’ inflation infiltration! LOL. It always puts such a damper on things.
Great article.
Jessica07 recently posted..Organize Your Finances- The Monthly Expenses Binder
Yeah, I’d rather not think about inflation…. but if I don’t, I’m not going to enjoy my future too much!
My inflation strategy is to outpace it while I can stomach the risk and then buy TIPS once I can’t.
Financial Success For Young Adults recently posted..How Young Adults Can Build Wealth
Not a bad plan. Check out my plan in tomorrow’s post!
Inflation is like a termite. It eats into your finances.
Doable Finance recently posted..Market Moves Affect Your Personal Finances
Very sneakily too I might add.
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