Are you prepared for inflation?
“Inflation is when you pay $15 for a $10 haircut you used to get for $5 when you had more hair.”
— Sam Ewing
In many parts of the world, inflation has already arrived. Rising prices for commodities — everything from oil to cotton to steel — are resulting in a rash of inflation in many regions.
In the U.S., we're already starting to feel the pressure.
Gas prices have increased over the last year. Clothing prices are predicted to rise by 10 percent this year. The USDA forecasts a 3.5 to 4.5 percent jump in grocery store prices, with the costs of some foods — such as beef and pork — rising by as much as eight percent. Prices are also increasing for electronics, appliances and more.
Inflation, of course, is one of the biggest threats to long-term investing. It can eat away at the purchasing power of your portfolio — and create a surprisingly big gap between what you thought you could afford and what you can actually afford.
Take a look at the chart below for examples of inflation's potential impact on retirement income needs. As you can see, even a one percent increase in the average inflation rate can have a big impact on purchasing power over time.
|Current Annual Income Need||Years to Retirement||Annual Income Needed at Retirement (3% average inflation)||Annual Income Needed at Retirement (4% average inflation)|
Chart assumes 100% income replacement rate. Inflation rate illustrated is hypothetical and may not represent actual inflation rates.
Plan for inflation
Although you can't prevent inflation, you can help to plan for its impact. Take inflation into account as you determine how much to set aside for retirement. You should also consider inflation when selecting your investment options. Consider options that have the potential to help your portfolio keep pace with rising costs.
- Calculated using a future value calculator such as the one at www.vertex42.com/Calculators/inflation-calculator.html