In 1960, a gallon of conventional whole milk was 31 cents, and today it’s $3.77 on average.[1] A few dollars might not seem like much, but that’s a 1,116% increase. Now that we’re seeing high inflation, the buying power of your money – including your retirement savings – could be seriously impacted. When calculating how much money you need to retire, consider what you’re left with after inflation.
The Eroding Effects of Inflation
We’ve seen sustained inflation for some time now, and no one knows when it will end. Year-over-year inflation was 7% in December, 6.8% in November, [2] and 8.6% in October.[3] You’ve likely noticed price increases recently, but have you considered how this will change your retirement finances in the long term? For example, after 10 years of 7% inflation, $1 million would be worth about half – $508,350. Even moderate inflation has a significant effect over time: After 20 years with a 2% inflation rate, $1,000,000 would only have the buying power of $672,971.[4]
When Will It End?
The short answer is that no one knows. Many factors influence inflation, including supply chain disruptions, labor shortages, and monetary policy. Recently, energy and food prices, used cars, furniture, and rent have increased more than other goods and services. In December, 49% of small businesses said they planned to raise prices in the next three months, according to the National Federal of Independent Business.
Inflation in the Past
Inflation can hurt purchasing power, which can weigh down economic growth. The last time the inflation rate was over 5%, the U.S. was in the Great Recession.[5] Some economists predict a 1970s style stagflation in this decade since we also saw higher energy prices and unemployment in 2021.[6] Inflation was as high as 14.5% in 1980.[7] To put it in concrete terms, the buying power of $100 in 1960 now has the buying power of $11.24.[8]
Inflation could be a reason we could see a major market correction this year. There are a number of potential strategies aimed at helping to protect your savings against inflation, and as financial advisors, we can help you explore them. When it comes to financial planning, the right strategies depend on the individual, their market risk tolerance, and income needs. Sign up for a complimentary financial review to find out more about these strategies and how we can help you create a comprehensive retirement plan.
[1] https://www.ams.usda.gov/sites/default/files/media/RetailMilkPrices.pdf
[2] https://www.cnbc.com/2022/01/12/cpi-december-2021-.html
[3] https://www.cnbc.com/2021/12/10/consumer-price-index-november-2021.html
[4] https://www.buyupside.com/calculators/inflationjan08.htm
[5] https://www.fool.com/investing/2021/08/28/stock-market-crash-likely-5-data-points-of-concern/
[6] https://qz.com/2068772/why-economists-are-talking-about-stagflation/
[7] https://www.federalreservehistory.org/essays/great-inflation
[8] https://westegg.com/inflation/infl.cgi?money=100&first=1960&final=2020
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