Have you ever heard your grandparents say something like, “How much is that candy bar?! 2 dollars?? When I was a kid, candy bars were only 2 cents!!” It sure makes them sound cheap when they analyze a ten cent difference in gallon of milk, and when they clip coupons every week from the local paper, but that’s what inflation will do to you!
For those of you that are in your twenties (or less), you haven’t really experienced inflation yet and you probably don’t realize the major impact that it could have on your future. With inflation averaging 3.4% per year, the change in consumer goods from year to year is barely noticeable, but what will this 3.4% increase do to your retirement plans? Let’s take a look.
The Prices of the Future
If we race ahead 40 years into the future, what would the prices look like for things like milk, bread, or a brand new car? These results might have you thinking twice before you mock the cheap mentality of your grandparents.
- Milk: Current price = $2.50, Future price = $9.72
- Bread: Current price = $1.69, Future price = $6.57
- New Tires: Current price = $500, Future price = $1,944
- New Car: Current price = $25,000, Future price = $97,217
- New House: Current price = $175,000, Future price = $680,524
The results of inflation don’t look so bad when we’re talking about milk and bread, but can you imagine paying almost $100,000 for a brand new domestic car or $680,000 for a basic house? That just sounds so crazy!
So How Far Will You Money Go?
The average family lives off about $50,000/year today. If you’d like to live with the same lifestyle when you retire, you’re going to be spending $200,000 per year? What if you have $1,000,000 stashed away in your retirement account? How long do you think it will last? Yep, only about 5 years. It’s hard to imagine blowing through a million bucks in only 5 years, but it’ll be pretty easy to do 40 years into the future when inflation takes its toll.
What Should You Do?
Ok, so apparently a million bucks isn’t enough to have in your retirement accout, so what should you do? To put it simply, diversify. In order to keep up with inflation, you can’t just blindly throw money into your 401(k). Sure, sometimes you can earn 10% or more on your investments, but some years you might actually lose money! What you need is a hedge against that pesky inflation.
One of the best hedges known to date is with real estate. Not only does the value of the property typically keep pace with inflation, but the rent you charge to your tenants can rise through the years as well. So, let’s say that you were able to earn $50,000 with your rentals today. In 40 years, with those same rentals, you should be earning $200,000 per year. It’s a very simple concept, which is why the wealthy have been hedging their investments with real estate for hundreds of years.
If real estate isn’t your thing, start brainstorming some other items that might grow in value throughout the years. Some of your retirement savings could be put into coins, collectables, precious metals, or perhaps even a collection of stamps! While these investments don’t produce a passive income like the real estate, they do still have pretty good odds of keeping up with inflation.
Do you have any ideas of investments that could keep up with inflation? What are they?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.