In the past few posts, I have been talking in detail about the five risks to your retirement that you must deal with now if you want to have a healthy retirement later. Inflation is another major risk to your retirement but most people don’t really give it too much thought.
What is inflation? Investopedia (2016) defines it as this:
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
There are more classical and older definitions of inflation, which include the idea of measuring the rate of the money supply. As governments continue to manipulate money markets in their favor, they expand or contract the amount of money in circulation, thus the idea of “measuring” the money supply. For example, if all the money in circulation was represented by X, and the government printed 30 percent more of X, that would mean the money supply was inflated by 30 percent. The symptoms of this would typically be rising prices to buy the same goods, which means your money is worth less and doesn’t go as far to provide you with your needs.
What that means to you as a retiring consumer is this:
Let’s suppose you retired with $500,000 in your retirement account; let’s also suppose you needed $50,000 to cover all your expenses in a year, which would be about average. But, if the money supply is inflated by 30 percent and costs therefore go up by 30 percent, that means next year, you would need $65,000 to cover all your expenses.
Inflation is a silent thief. Most governments use it to pay deficits and debt because it ends up costing them less, and most people don’t feel it, even if they are for sure being affected by it. Henry Hazlitt said:
The long term effects of inflation are devastating to a nation’s economy, and once it begins it is difficult, if not impossible to stop. You can see the effects of inflation on the US dollar in the following graph:
So, while this is a snapshot of how inflation affects the entire economy, think of the effects inflation has on you personally and your retirement! If you don’t have income that continues to grow each year, without depleting your current retirement accounts, you are going to end up running out of money. For exciting ways to create a predictable retirement you cannot outlive, regardless of inflation risk, contact me: peter@moneymastery.com.
