One of the things that few of us factor into our retirement planning is inflation.
We estimate possible returns, and try to decide how much to side aside each month.
However, with inflation a reality (and some think that it will get worse in coming years), and with talk about “chained CPI” floating around, it’s important to consider the effect that inflation could have on your retirement down the road.
What is Inflation?
The most basic definition of inflation is a rise in prices. Over time, prices rise. This is inflation. Alternatively, inflation is also considered the erosion of the value of a dollar, or a reduction of your purchasing.
At its heart, inflation simply means that your dollar doesn’t go as far as you would like. When you are planning your retirement, it is clear that you need to consider the United States inflation rate, and how it will impact your nest egg over time, reducing the value of your retirement funds.
Beating Inflation
While there is no sure way to predict the inflation rate in the coming years, you can use a historical rule of thumb to estimate the likely yearly inflation rate. Many like to assume that inflation will clock in, on average, at 3% annually. Use an inflation calculator, and you can see how much $1 million will really be worth when you retire in 30 years.
As you decide how much you need to retire, don’t forget to consider inflation – and how you can beat it. There are certain investments that give you a better chance of beating inflation, and seeing a return that can help you overcome the drop in purchasing power that comes as time progresses.
One of the reasons that stocks are considered a good choice for a retirement portfolio (index funds and ETFs are often recommended) is that they are likely to offer returns that beat inflation. Cash rarely even keeps pace with inflation. If you rely on cash, you are likely to lose money in real terms. Even bonds might not keep pace (although some investors like inflation protected bonds from the US Treasury).
You can also increase your chances of beating inflation with the help of passive income, or by owning a business. Having a regular stream of income that increases over time, even as inflation rises, can help you keep pace with the chances in purchasing power, and reduce the chances that inflation will ruin your retirement.
The best defense you have, though, is saving up as much as you can right now. The more you set aside now, and give time to grown with the help of the magic of compound interest, the more likely you are to be able to beat inflation, and see a nest egg that can withstand any amount of reduced purchasing power.
Start planning now to save up as much as you can toward retirement. Inflation is coming, and it will impact the comfort you feel during retirement. Do whatever you can to avoid letting higher costs drain your nest egg faster than you expect.