Inflation: The Not-So-Silent Retirement Killer
March 23, 2022
Your long-term retirement strategies must account for inflation – or else.
You hear it all the time: you should make sure your retirement savings at least keep pace with inflation. But what is inflation and how does it really affect your retirement savings? Let’s explore.
Inflation is defined as an increase in the general level of prices for goods and services. Deflation is a decrease in the general level of prices for goods and services. If inflation is high, at say 10% – as it was in the 1970s – then a loaf of bread that costs $1 this year will cost $1.10 next year.
Inflation in the United States has averaged around 3.24% from 1914 until 2021, but it reached an all-time high of 23.70% in June 1920 and a record low of -15.80% in June 1921. Most will remember the high inflation rates of the 70s and early 80s when inflation hovered around 6% and occasionally reached double-digits. But in 2021, inflation went up every single month.
How Does Inflation Impact Your Retirement?
The answer is simple: inflation decreases the purchasing power of your money in the future. Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its value.
From another perspective, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well, your $100 will be reduced to just $34.44.
How is Inflation Calculated?
Fortunately for us, we don’t have to calculate inflation – it’s done for us. Every month, the Bureau of Labor Statistics calculates indexes that measure inflation:
- Consumer Price Index – A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser.
- Producer Price Indexes – A family of indexes that measure the average change, over time, in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.