News reports constantly remind us that inflation affects the U.S. and world economies — it also has an impact closer to home. Economists define inflation as the average increase in prices of commonly used goods and services, such as food and gas, over time (typically measured annually).
When inflation goes up, your buying power goes down and your cost of living increases. In fact, the U.S. Department of Labor thinks inflation is such an important concern that it offers an Inflation Calculator designed to help you see how inflation has affected buying power over the years.
Why inflation matters
Many experts say you’ll need 70 to 90 percent of your current income to maintain your standard of living in retirement. But when you consider other factors, like inflation and healthcare costs, financial experts say that you might need as much as 126 percent of the amount you’re making when you retire.1 Taxes and inflation are tough to beat, but this is a very important concept that must be understood by those looking to retire in the near future. A simple retirement planning strategy such as using both stocks and bonds may be the most logical way to beat inflation.2 To see how much income you might need in retirement when inflation is factored in, use our Interactive Retirement PlannerSM
Inflation vs. rate of return
If your MSRP investments don’t keep pace with the rate of inflation, you could lose buying power. The difference between your investments’ total rate of return and the inflation rate is often called the real rate of return. Here’s a simple, hypothetical example:
If you invested money at a five percent interest rate and inflation also goes up by five percent, you’ll basically earn nothing.
But, if the inflation for the year is only two percent, you’ll make a profit of three percent on your investments.
On the other hand, if your investments are earning five percent and inflation is, say, seven percent, you’ll be looking at a two percent loss.
Keep in mind that investing involves market risk, including possible loss of the money you’ve invested. There’s no guarantee you’ll reach your investment goals. In addition, this example is not meant to project the returns of any specific investment. If fees and expenses had been deducted, the returns would’ve been lower.
Get the help you need
Talk with one of our Team MSRP Retirement Specialists for more information about planning for your retirement. Information provided by Retirement Specialists is for educational purposes only and is not intended as investment advice.
1 Hewitt Study Reveals Widening Gap Between Retirement Needs and Employee Saving Behaviors, http://hr.cch.com/news/pension/072308.asp (accessed 6/15/11).
2 Combating Retirement’s Silent Killer: Inflation, Gregory Bresiger, www.investopedia.com, (posted September 4, 2011).