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How much will things cost?

Purchasing power risk or inflation risk is often underestimated. Those living on a fixed income are more vulnerable to price increases than those in the work force—who often receive cost of living raises.

Although Social Security benefits usually adjust upward to reflect higher costs, most retirees would argue these Cost of Living Adjustments are insufficient. Few pensions offer annual COLAs. Of those that do, many are considering doing away with the annual adjustments. The COLAs that do survive may lag the actual increase in the cost of living.

America has enjoyed relatively low rates of inflation since the early 1980’s. Those mature enough may remember the rampant inflation that characterized the 1970’s. None were spared the pain, but it was felt most acutely by those living on fixed incomes.

To put this in perspective:

  • At 3% inflation, what costs $1 today will cost $2.43 in 30 years.
  • At 4% inflation, what costs $1 today will cost $3.24 in 30 years.
  • At 5% inflation, what costs $1 today will cost $4.32 in 30 years.

To better understand this risk, we encourage you to play around with the Bureau of Labor Statistics Consumer Price Index calculator. This tool uses actual historical data to help you understand just how expensive life has become over the years.

It is critical that at least some of your retirement assets include a hedge against inflation.

 

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