Inflation is the worst kind of enemy to your wealth. During any single year or even several years you do not really notice it. However, like a slow leak in a water pipe, when the damage surfaces it is usually substantial.
When you plan for retirement you need to account for the full effects of inflation. If you don't you could run out of money or have to cut back on your lifestyle when it is too late to adjust.
Inflation averages about 3% - 3.5% per year. It is hard to notice because so many expenditures are coming and going in a typical household. For instance you may buy braces for your daughter but your son didn't go to camp like the year before. You bought a laptop but you also took a less expensive vacation. In total, you may have spent the same amount of money as the year before. It might even seem like less because you got a nice year end bonus this year.
Since you had a good year you may not have paid attention to the bump in gas prices or a 7% increase in your home and auto insurance. In addition, maybe your employer absorbed the rise in health insurance costs. When you are retired and possibly on a fixed income those inflationary items jump out at you.
Let's assume you retire at age 65 with expenditures of $60,000 per year. By the time you are 86 years old your expenses will double to $120,000 if inflation averages 3.5%. If happens gradually but one day you look up and you are spending a lot more money just to maintain the same lifestyle.
When you put a competent retirement plan in place you can actually treat inflation as if you're getting a larger budget to work with. For instance, in 'year one' of retirement you are making sure you are staying within your budget of $60,000. Budgeting inflation at 3.5% will push your expenditures in 'year two' to $62,100. If you have planned well you can look forward to 'year two' knowing you can spend $2,100 more than the year before. This underscores the importance of a good retirement plan. If you have confidence in your plan, inflation won't bother you. You know that even with inflation you will not run out of money or compromise your lifestyle...good luck
David Skill, a 'Chartered Retirement Planning Counselor' has created an easy retirement system that enables conscientious baby boomers to determine how much money they need to retire. David asks all the vital questions, uses common language and plenty of examples so the participant builds confidence their money will last through retirement and they will not burden their children.
Check out http://babyboomerseasyretirement.com/
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