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How Much Will Living Costs Be When You Retire?

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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?

Investing Money

AUTHOR Derek

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.

17 Comments

  1. Sadly, I have no brilliant ideas. I’m following a diversification strategy while also hoping for the best and planning for the worst!

    • I have recently heard of junk coins, which are coins that were made before 1965 and are 90% silver. That could be a pretty cool investment to hedge against the ever-inflating dollar.

  2. I stay diversified in my retirement holdings with risk allocated for my age. I would like to add some real estate but have other goals we must complete before we get to that stage.

    • You’ll get there Lance. Don’t rush it. I’m sure you’ve planned accordingly.

  3. Since most of my day to day expenses will be covered by fixed income such as Social Security and a pension, I am investing in mostly growth stocks (hi tech, biotech, healthcare & othe growth areas).

    • I suppose it’s ok to take that risk since your major expenses will be covered by your fixed income. That’ll turn into some nice play money for you! 🙂

  4. I hope to buy several rentals over the next few years. Hopefully, this strategy will pay off. People always need somewhere to live.

    • I think it’s a great strategy! I’m trying to ditch my mortgage before I get into the real estate game, but I’ll be right there with ya.

  5. I’ve thought more about real estate since we started home-hunting. There are condos that are frequently rented out by grad students in our town. Hubs & I could buy one for $60k and pay it off in 3 years. By that time hubs might get a field assignment with work and we’ll go somewhere for 1-2 years and we can rent out our condo, use the money we’re saving while out of the country, and purchase a home when we get back but keep renting the condo. Not sure if it will happen but I’m just daydreaming long term…

    • Sounds like you and I think a lot alike Jessica! I have a similar plan with our house. We still owe about $59,000, but if we really work at it, I bet we can get rid of that in just a couple of years. Then come the rental properties! 🙂

  6. I have no idea, and I’m scared to think about it. Of course, if my income grows accordingly then it won’t be much of a big deal after all. It’s much easier to plan than predict…

    • The best case scenario is not to increase your earned income, but your passive income. Unfortunately, this is not always so easy to do.

  7. I will invest my money which I don’t know yet. I agree it is not easy to plan and do. Your family’s future is based on your decision.

  8. I’m relatively aggressive in my 403(b) investments…I’m in my late 30’s, and I didn’t really start with retirement investments until a few years ago, but I think I have some time to catch up and also to recover should the stock market tank again (and again again, who knows!). I’m getting a match from my employer that’s fantastic (after first year of employment, they give you 5% for “free” and then another up to 5% matched), and I do another 5% voluntary contribution. Wicked! With my aggressive investment strategy, I’m earning a pretty serious return thus far – about 14.5% this year. BUT if I take into account just what I’ve put in since I started the 403(b) and count the employer contributions towards return/growth, then I’m looking at about 75% return over the lifetime of the 403(b) so far – WOWZA! I know I realistically can’t keep up the 14%+ returns long-term, but it really does feel good to see my money growing in leaps & bounds. Hell, I just made over $200 this week with the market upswing!

    Now as for whether this will be enough for me to get by in retirement? Hrmph. I dunno. Social Security should cover (very) basic living expenses, or so the online calculator from the SSA tells me. If I’m relatively conservative in my investment growth calculations, I should have at least $1 million…if I’m less conservative in calclations, it is up to $1.6 million or more by the time I retire. If I adjust those numbers to account for 3% inflation, then we’re looking in the $425K-$725K range instead. Hrm. Doesn’t seem as impressive! By the way, I’m using the investment calculator here: http://personal.fidelity.com/toolbox/growth/growth.shtml. Nice tool that lets you do a bunch of what-if scenarios without having to do a ton of math. Very motivating to see how contributing a bit more now can really pay off long-term.

    In reality, I’m probably going to be contributing more & more to retirement investments as my income grows. For as long as I’m with my current employer, I’m always sticking with the 10% number and getting my match to bring it up to 20% of my gross income. That’s a no-brainer. As I get bumps in salary, I plan to keep my standard of living the same & put those extras into two areas: paying down debts & investing more (IRA, Roth IRA, small stock account with ING).

    • Sounds like you had a pretty good year in the market with your company contributions. That’s awesome!

      I noticed in your response that you mentioned Social Security. I agree that it will be around for a while longer, but the age requirement will continue to grow (when I retire, I expect it to be 75 or more), and only certain income groups will qualify, so I wouldn’t count on receiving any of that benefit if I were you. If it turns out that you do, then good, that’ll be a bonus. Keep up the great work on your contributions!

  9. I know what the historical numbers look like, but I’m not so sure about the future of the real estate market as being the absolute answer against inflation. I live in an area of the country where housing values decreased by 33% or more after the housing bubble burst. Real estate markets are still markets and subject to fluctuations. Unfortunately nothing is 100% risk free.

    • Yes, real estate fluctuates too, but it seems to be at an all-time low. Plus, your real earnings are in the rent, not the actual value of the buildings. Although, it would be nice if the value increased along with inflation. 🙂


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