Don’t Let Inflation Eats Up Your Retirement Money

Are you the type of person who only pay attention on chasing interest rate in choosing investing vehicle for your retirement plan? You better think again. In investing for your retirement, many novice investors only run after interest rate, but missing the point of inflation and tax. You may not realize, but after you take into after-inflation and after-tax, you might be losing your money. At the end, when you should reap the fruit of your saving on retirement days, you may realize the hard fact that it is not enough. Inflation really taking stroll in your retirement planning goal.

Few new retirees remember vividly when they could buy a new house for under $7,000. A loaf of bread cost only 7¢. People who retired in 1965 saw prices increase by almost five times in the period between 1965 and 1995. They realize that inflation take away the return of their investment until it is practically worthless. Should you still have 20 years for your retirement horizon, you should take consideration of the amount of inflation that will affected your money until your retirement years. Just like investing rate, inflation is something that compounds over time even though the amount is constant every year. Annual inflation rate has averaged about 4% over the last 10 years. The accumulative effects of inflation is alarming.

It begins in 1925 with something that cost $1.00. During the Great Depression, that $1.00 prices actually fell for several years. From the 1930s on, prices increased slowly until about 1970. That period of very moderate inflation influenced the writers of the retirement books of the time. They totally ignored inflation in their calculation, because they think the amount is so small and can be dismissed. This was commonplace in the 1970’s and investors were feeling great about it when they should have been frantic. At that time, inflation rose from 3.25% to 11%. It topped in 1980, when inflation reached all time high of 13%. In the mean time investors thought they were making more money compare to bank because CD rates were paying 12.94%. In reality, the opposite is true, investors actually lost their money.

There just wasn’t much difference between a cost-of-living-adjusted pension and a fixed pension for a person who was only going to live 10 to 15 years maximum in retirement anyway, using the shorter life expectancies of the time. Then inflation raised its ugly head. It quickly started to erode the value of fixed pensions and investments that paid a fixed interest rate, both of which returned less valuable dollars each year. And at the same time life expectancies started to grow appreciably.

We’ve seen inflation destroy the value of fixed pensions, investment returns, and savings. At undesirable circumstances the you may be forced to do what most retirement do when their savings are eaten away by inflation: moved into more affordable home with costing less prices and utilities fees. At the worst scenario, you may sell your home and move into apartment or move into your relative’s and friend. But don’t assume this will be likely the easy solution, as the rent fee will be soar as the years went on due to inflation woes.

Once you have determined these inflation numbers and take into account its compounding effects, you can see whether your retirement plan is sound or flawed. If you still have long horizon till your retirement time, this should be a main concern for your retirement planning. You should try different scenarios of including different number of inflation and see how your plan works.