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| Inflation: Bye Bye Buying Power |
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"I remember when candy bars cost a dime." We've all heard that line before, or one like it, from a parent or grandparent. But before you roll your eyes, remember that it's true. Candy bars did cost only 10 cents in 1965. And a new Ford Mustang cost only $3,300. So what happened?
Inflation, that's what. Inflation is the gradual increase in prices over time. And as prices rise, the money you have in your pocket buys less and less. That's why inflation is one of the biggest threats to your retirement savings and one of the main reasons you should never stuff money under the mattress. For instance, let's say inflation averages 3% over the next 30 years. By the end of those three decades, the $100,000 you stuffed under your mattress would only be worth $40,000 in today's dollars. Should inflation really be trending higher, look out: If inflation clocked in at 6%, the purchasing power of $100,000 would fall to just $17,000. At 10%, $100,000 would be worth a meager $5,700 in today's dollars. That's why you need to invest your nest egg in something that earns more than the rate of inflation. Many savings accounts, money-market accounts, CDs, and other low-risk investments don't do that. So, while it's still a good idea to use these options as a cushion or a place to temporarily store some money, you also need to put money in more aggressive investments to help outpace inflation. Finally, don't assume inflation won't be a problem in the future. Sure, compared with the 1970s, when inflation was way above 10%, our current rate of inflation isn't very high. Still, even at a 2.5% rate the price of a candy bar will double in 24 years. Just in time for you to tell your kids or grandkids, "I remember when candy bars cost 75 cents." |
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