We’re often told that we need to invest wisely and take other steps to prepare for a comfortable future. However, we’re also told to live in the moment and take life as it comes. Ideally, you’ll find a way to enjoy the things you love now while laying a solid foundation for your future self.
Ask any investment expert or SMSF Accountant, and they’ll tell you that one of the main factors people fail to consider when laying this strong foundation is inflation. Factoring inflation into your calculations can make or break your retirement, so keep the following information in mind when planning for your future.
1. Your dollars won’t go as far in the future
While a dollar in the future will be the equivalent of 100 cents, just as it is now, its purchasing power will be very much dependent on inflation. As the years progress, the cost of the goods and services you use will gradually increase due to inflation, meaning your savings won’t buy you as much in the future as they would now.
This is why it’s essential to have a retirement fund that’s netting you more in interest than the annual rate of inflation. It’s also important to factor inflation into your retirement projections. You may think you can retire (and stay retired) at 45, but if you fail to factor in the rising cost of goods and services, you will miscalculate the amount you need to be saving each month to achieve that goal.
2. Social security generally doesn’t keep pace with inflation
While social security does undergo periodic reviews, with cost-of-living adjustments (COLAs) applied to suit, these adjustments rarely cover the full impact of inflation. In other words, many senior citizens are left with an income that’s effectively shrinking in terms of what it can buy them.
This is why it’s essential to start planning for your retirement as early as you can. Your aim is to avoid the need to rely on the social security system. Sadly, it just isn’t adequate for most people.
3. Some investment types don’t keep pace with inflation
While the Federal Reserve (the Fed) says it aims to keep inflation at around 2%, even over the last couple of decades, it has fluctuated between 1.8% and 3%. If you have a high-interest savings account, certificate of deposit (CD), or bonds, it’s highly likely that your current interest rate is lower. If this is the case, these investments are, in a way, depreciating in value.
Of course, this doesn’t mean you should ditch them altogether. Such safe, slow-burning investments can be a great way to balance the riskier elements of your portfolio. High-yield savings accounts are also highly suited for housing your emergency fund as they are easily accessible, and the small amount of interest they bring in is better than nothing.
4. Inflation has less of a sting for minimalists
Remember in the first point how we said that a dollar is still composed of the same number of cents, both now and in the future? It’s the cost of the goods and services you want that changes. In this fact lies a path you can take to reduce the impact of inflation on your life. The less you buy, the less of an impact it will have on you. If you adopt a minimalist approach now, you’ll also have more money to direct into your retirement fund, making it a win on more fronts than one.
Keep the above information in mind, and you’re armed and ready to offset the effects of inflation on your retirement fund.