DISQUS

Seattle Simplicity · 3 years ago

I *love* the Dr. Evil pic!

traineeinvestor · 3 years ago

I fail to see how any sensible retirement plan can fail to take into consideration the effect of inflation (using "inflation" in the sense of an increase in the cost of living rather than an increase in the money supply). As your example shows, even a relatively "low" rate of inflation can have a huge impact on the real level of income in retirement.

A related point to consider is what is the rate of inflation? The CPI numbers are generally regarded as understating the true rate of general consumer price increases. Also, in the context of retirement planning you need to consider whether the general rate of price increases is representative of the rate of increase in your personal living expenses.

brett · 3 years ago

First, great post in terms of hitting a key concept.

Second, we have a net worth of over 400K and certainly do not consider ourselves well-off. We worry about job security, we worry about the domestic and world stock markets, we worry about the impending insolvency of Social Security and Medicare.

Third, I had an experience of explaining inflation to a friend. She had a target net worth of 1.2M for retirement and I said "wow my target is 2.5M". After digging a little deeper it turns out she had no inflation assumption but I was assuming 3% for 25 years, so in fact we ended up having nearly identical goals if we inflation-adusted her figure. Point is: your post may be a wake-up call to some.

Flexo · 3 years ago

Thanks for the comments Seattle, trainee, and brett. I also agree that the standard CPI numbers understate what I've been feeling and seeing as inflation. Gas prices do more of a number on costs of everything than people want to admit... and is purposefully left out of the core CPI.

Brett, thanks for your kind comment. I've also talked to people who sound so surprised and almost insulted when I say that I'm going to most likely need much more than $1,000,000 when I retire 30+ years from now unless I move to another part of the world.

Jason · 3 years ago

I did this same thing when I sat down awhile back to figure out how much I will need in retirement, I at first forgot to take into account inflation. It was pretty shocking how much more you have to save when you factor in inflation. I think most people out there don't even think about it when they are planning for retirement.

As far as the CPI understating inflation, I totally agree. It has seemed as though the cost of everything is rising alot higher than 2 to 3%.

G. · 3 years ago

Originally, I believed that 1 million dollars would be enough to live comfortably in retirement, but I had not accounted for inflation. I will have to adjust my retirement savings goal and my plan. Thank you for the valuable insight. Great article.

Dale G. · 3 years ago

I prefer to do my calculations in terms of the rate of return after inflation. What you pick for your expected inflation rate is a matter of judgement, but it means that you are assuming that your end numbers are stated in today's dollars.

Dus10 · 3 years ago

What is really crazy about this is that you can amortize the $8,250 annually at a rate of 8% and get to nearly $1M in 30 years. And, even considering inflation, if you do not increase the $8,250 annual contribution, you can still get to $2.5M with little change.

First, amortize the $8,250 annual contribution with the same rate of 8%, but instead of 30 years, do 35 years. You will find it is more than $1.5M. Next, amortize the $8,250 annual contribution, but change the rate to 10% for 25 years. Voila! $2.5M!

The one thing that this does not take into account is that you should be increasing your annual contribution with each passing year. Maybe you should step it up based on a rate of 3%, similar to inflation. That alone will make a huge dent in the original amortization of 30 years at 8%.

bigbuddha · 2 years ago

I've said this for along time, CASHFLOW is king, because at the end of the day, if you don't have enough consistent cashflow, you can't put food on the table.