Inflation is an economic phenomenon that people do not often think about and sometimes do not understand. Inflation, however, is very important to the supply of money and the costs of items that people regularly purchase. Therefore, people need to incorporate the effects of inflation into their long-term plans. When people plan for their retirement, they need to understand how inflation will play a role in their retirement funds.
Inflation is the effect that allows the prices of goods and services to increase over time. For example, gas prices were much different five decades ago, primarily due to inflation. Inflation is a normal occurrence caused by the changing amounts of supplies from producers and demands from consumers. Changes in the amount of money that is in circulation also play a role in inflation.
The Damaging Effects of Inflation
Inflation can impact a retiree’s retirement negatively in several ways. Inflation will cause the costs of goods and services to be more than the retiree initially planned on spending. Additionally, inflation will decrease the values of the retiree’s investments.
So many factors and events play a role in the inflation that a supply of money experiences. Therefore, a person planning their retirement will not know exactly how much inflation to plan for ahead of time. However, a future retiree can observe the patterns of inflation over previous years and make estimates based on these patterns. When developing an estimate, the future retiree should aim to overestimate the amount of money they will need for retirement rather than underestimating it. The overestimate will allow the retiree to avoid potentially needing to return to work after their hiatus. Any leftover money can be invested by the retiree for their family members or donated.
Inflation happens naturally and is a process that cannot be avoided, only mitigated. When developing a retirement plan, a person needs to account for how inflation will play a role in their retirement. Planning for the effects of inflation will allow a person to comfortably enjoy their retirement while also leaving funds for future generations.