Best Retirement Calculators
Inflation – A retiree’s enemy
Definition of inflation – “an increase in the price you pay for goods or services or a decline in the purchasing power of your money”.
The key statement in the definition is the “a decline in the purchasing power of your money”.
When people are saving for retirement, they usually invest in stocks which increase in value with the economy and therefore are not hurt by inflating prices. However, these assets are not as secure as fixed assets such as CD’s so most retiree investments are in the safer non-inflating investments.
When the investments are in fixed dollar investments, inflating prices decrease the purchasing power of these funds over time.
It is important to learn that whether you're in hedge funds or fixed
investments, your investments need to be sustainable over time, lest they damage your ability to
continue generating a profit in your portfolio.
On the bright side, if you own your house, its value will grow with the inflating economy and the value of the housing market in your area.
Who Measures Inflation Rate?
In the United States, this is measured as a percentage of the change of the consumer price index (CPI) which is published by the Department of Labor – Bureau of Labor Statistics (BLS) (http://www.bls.gov/CPI/) on a monthly basis.
The news release about the monthly change in the Consumer Price Index is released in the middle of each month for the preceding month. It can be read at http://www.bls.gov/news.release/pdf/cpi.pdf. This news release also gives the overall inflation rate for the month and breaks it down into its components.
The following table shows the inflation rate in the United States by year since 1940:
Note: This information is extracted from the history of inflation in the United States since 1913 on the BLS website.
Except for the high rates in the late 1970’s and early 1980’s, it has been fairly steady. Note the deflation in 2009.
What inflation rate should you use to calculate your retirement?
This is where the crystal ball and research will give you an answer.
The Congressional Budget Office is charged with projecting the future in order to develop budgets that anticipate future trends.
A quote from the 2015 CBO Budget Report says:
"By CBO’s estimates, the rate of inflation as measured by the price index for personal consumption expenditures will move up gradually to the Federal Reserve’s goal of 2 percent, hitting that mark in 2017 and beyond."
You can find the latest detailed forecasts by the CBO In the Long-Term Budget Projections section. The information you want is the percent change in the Consumer Price Index, All Urban Consumers (CPI-U). This is the inflation rate.
Using the above information, develop your own estimate for the average inflation rate during your retirement.
A great feature about the best retirement calculators – you can try various scenarios of rates to see how they will impact your retirement plans.
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To go to the home page click, Finished with Inflation
John Howe, Inc. - Copyright 2015