The Effects of Inflation

In the world of retirement planning, inflation can be a deal breaker. Inflation is easily the number one most overlooked factor I see when talking about retirement planning with potential clients. In this calculation, I am going to show you the effect inflation can have an your retirement income!

For our example let’s use a 45 year old. We will assume this person graduated high school and entered the work force in 1987 for the purpose of calculating inflation.

Inflation 87 to 13





Now that we have established our average inflation rate, we will use this number to run our calculation. Now let’s assume our 45 year old is retiring at age 65, has a current income of $120,000 growing at 2.5% a year, currently has $80,000 saved, and is earning an after-tax rate of return on their money of 4.5%.

Inflation Calculation













This calculation is telling us in 20 years when our 45 year old retires, they are going to need to withdraw their current earned income of $120,000 plus an additional $89,977 from their nest egg to maintain the same lifestyle in retirement that they are while working! This 45 year old would need to be saving 94.08% of their annual income JUST to carry their current lifestyle into retirement! That obviously conflicts greatly and creates a war between current lifestyle and future lifestyle. When I put together creative financial strategies for clients I take inflation into account and create solutions that can hedge against inflation and other challenges that effect retirement income.

Have you answered the four toughest financial questions that relate to retirement? If not, when do you want to know:

  1. What rate of return do you have to earn on your savings and investment dollars to be able to retire at your current standard of living and have your money last through your life expectancy?
  2. How much do you need to save on a monthly or annual basis to be able to retire at your current standard of living and your money last till life expectancy?
  3. Doing what you are currently doing, how long will you have to work to be able to retire and live your current lifestyle till life expectancy?
  4. If you don’t do anything different than you are doing today, how much will you have to reduce your standard of living at retirement for your money to last to your life expectancy?

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