Inflation and the Purchasing
Power of One Dollar |
Average Annual Rate of Inflation |
Years |
3% |
4% |
5% |
0 |
$1.00 |
$1.00 |
$1.00 |
5 |
$0.86 |
$0.82 |
$0.78 |
15 |
$0.64 |
$0.55 |
$0.48 |
25 |
$0.48 |
$0.38 |
$0.30 |
The Impact of Inflation
Another variable that you must contend with as you plan your retirement is inflation. Once you find yourself without a salary that keeps up with the cost of living, you'll become keenly aware of how inflation can erode the assets you have. It's likely that the cost of goods and services will increase and you'll need more at retirement than you do now to enjoy the same things. You don't want to reduce your standard of living, yet you don't want to run out of money.
Figuring the impact of inflation can be fairly time-consuming. The long-term historic rate of increase in the Consumer Price Index is 4%, so that's a fairly safe number to use for the rate of inflation.
To offset inflation, your income must rise each year. Assuming you don't go back to work, this income must come from a pool of assets that is also growing. |
