By Marvin Rotenberg, IRA Technical Expert
We have written many times on the subject of annually funding retirement vehicles such as 401(k) plans and IRAs so you will have enough money to enjoy a financially secure retirement. The earlier you start contributing to your retirement accounts, the more you will have when you actually reach retirement age.
A big impediment to all the best laid plans for funding a secure retirement is inflation, which has a way of eroding your savings over time. The fact that inflation has been relatively low during the recent economic malaise has masked how inflation can seriously reduce an investor’s long-term purchasing power. Also, fewer financial columnists have addressed this issue over the last few years as other matters have grabbed the headlines. However, regardless of the official rate reported by the government, inflation remains a terrible threat to everyone’s financial health, particularly retirees.
Unlike mutual funds or stock and bond prices, inflation’s daily fluctuations are not tracked in the media. Inflation is an invisible, silent killer - the high blood pressure of the financial world. Just as you can have high blood pressure for years and not know it until you suffer from its consequences, inflation can quietly shrink the purchasing power of your dollars without you ever realizing that you are at risk.
Although it may be easy to understand what inflation is, it is often difficult to grasp what it will do to you. Simply stated, inflation erodes your money’s value. It makes the same products or services you buy today cost more in the future, possibly double or triple the price, whether it be a haircut, a house or a loaf of bread.
It is easy to take inflation too lightly because it seems so benign. When you hear that the inflation rate for a particular year was 3%, you might think, that’s three cents on the dollar, what’s the big deal? However, the impact of a few pennies, continually compounded over decades, can significantly undermine your chances of achieving the investment and retirement goals you have carefully established. Need some affirmation on that? Just ask those who have already retired and have seen the purchasing power of their fixed incomes slowly erode over 10, 20 or 30 years.
Saving consistently, and adding to your savings rate incrementally as your income increases, is a good one-two punch to beating inflation. Being a frequent saver and prudent investor for retirement really does matter.