Investing 101: Are You Considering Inflation as You Plan for Retirement?

No matter how young you are, it is never too early to begin planning for retirement, and it seems that, these days, worry over retirement planning begins even before a career. This planning generally includes terms like 401K, employer matching, and social security. However, one thing that many people seem to overlook, and that can unfortunately, compromise the economic feasibility of their retirement plans, is inflation. Are you considering inflation as you plan your retirement? Here are some things you should know:
Inflation in real terms. What we know about inflation (and what most of us think about when we hear the word “inflation”) is that the value of our money goes down over time. We can even look at charts depicting average inflation rates over previous decades and, to some extent, predict future inflation rates. However, what many of us have a more difficult time grasping is the exact ways in which inflation will affect us financially. In this case, it helps to have some good, solid numbers. In real terms, if the inflation rate increases at an average rate of about 2.8 percent (this is in line with the current inflation rate increase pattern) over the next 25 years, what costs us only $100,000 today will cost us nearly twice that amount at the end of the 25 year period. Simply put, it will cost about twice as much to maintain the same quality of life. Even a slight increase in that inflation average can significantly increase that disparity.
How to calculate inflation. Fortunately, you don’t need a fancy calculator or a degree in economics to determine how inflation rates will affect your retirement savings. Simply search the web for an inflation calculator and plug in some terms. You may choose to stick with the 2.8 percent inflation rate average, but you may also want to play it safe and plan for higher inflation.
How to invest. Once you’ve determined how much you will need to maintain your desired lifestyle in retirement, you need to make some wise investments. Of course, the sooner you start, the better, but even current retirees can take measures to prevent their retirement savings from being eroded away by inflation. For starters, you should always have a majority of your investment dollars in diversified and well-balanced stock portfolios; look for the best stocks with a long history of increasing dividing payments, and be sure to consider US inflation-protected securities. Keep in mind that, while bonds and CDs offer fixed returns, they may be easily eroded in the face of inflation.
As you can see, inflation can either make or break your big retirement dreams. Take your future financial security into your own hands by hedging the risks associated with inflation.
About the Author: Nicole Keller loves to plan for retirement and hopes to retire early. He used to learn about the market before building his portfolio and highly recommends you give it a try, too.