Feb 13, 2018
Inflation and Retirement Planning, What you Need to Know
By Lindsay Goldwert
Planning for retirement is probably the most important financial task in anyone’s life. Sure, there are other priorities, but if you don’t do a good job of planning for retirement, you could be working for the rest of your life.
While retirement planning requires keeping an eye on numerous factors, one of the most important is inflation.
When planning for retirement, one metric you can rely on is the Consumer Price Index, or CPI.
Why an accurate rate of inflation matters
Some retirement planners can set their clients up for failure with a costly mistake: they assume a 3% rate of inflation.
Over the past 40 years or so, the average rate of inflation has been about 3.0%, according to the U.S. Bureau of Labor Statistics. But the rate can can jump around a lot.
If we look at the period following World War II, the rate was closer to 6%; and during the pronounced inflationary period from the 1960s through the 1970s, inflation was frequently in the double digits.
These changes make huge differences to investment portfolios. You can use the Consumer Price Index inflation calculator to view other time periods and see for yourself how much the rates can fluctuate. Using a 100-year-average just isn’t a very practical way of planning for retirement.
The reason it’s essential to use an accurate rate-of-inflation when planning for retirement is that you could fall short of your target amount if you don’t.
For example, if you didn’t take inflation into consideration at all, you’d fall short of your goal by whatever percentage the dollar lost in value during the time period you were saving. Someone who wants to retire this year, who began saving in 1978, could be in for a jarring shock if they weren’t aware that the dollar would be worth less than half what it was 30 years ago.
The CPI Rate of Inflation
That said, there are many sources for the current rate of inflation, but no one “official” version.
The best is the CPI, because it takes a comprehensive look at a large basket of consumer goods and services over time. Fortunately, this is the standard most often used by the media, so if you’ve been paying attention to inflation, you’ve probably received accurate numbers.
If you’re investing in commodities, this site is also good for looking at the rate of inflation for food and energy products, which could be important to know when deciding on your portfolio.
Keeping Your Retirement Plans Ahead of Inflation
If you’re planning for your retirement, you may be concerned that inflation is yet another component you must now track closely. It can quickly seem overwhelming.
Inflation doesn’t have to hurt your savings, though. By investing your money, you are effectively trading savings for other type of assets, like stock, or real estate. These investments tend to be less affected by inflation than cash sitting in a savings account.
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