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Financial planning with inflation in mind

by John R. Berry

Let’s pretend you are 50 years old. You have $1,000 in your wallet. Did you know that in 1968, the year you were born, $137.50 had the same buying power that a grand does today?1

That simple example demonstrates the work of inflation. Inflation is a general increase in prices and fall in the purchasing value of money. This is why a hamburger in the 60s cost 20 cents versus several dollars today.

We don’t always live in an inflationary environment, but prices do tend to rise over time.

Inflation is a known challenge to a financial plan and must be taken into account. In our planning process here at Corner Post Financial Planning, we estimate it will cost 3 percent more each year for you to live. This is a conservative, reasonable assumption based on Bureau of Labor Statistics historical figures.

To use a real-world example assuming 3 percent inflation annually, we recently projected that a couple who lives on $40,000 per year in 2017 would need over $70,000 in 2037 to maintain the same lifestyle. For special goals like college funding, we apply a higher factor based on inflation figures particular to that item.

Keeping inflation in mind matters because your hard-earned dollars will decline in worth if they are not growing through saving and/or investing. Stick some money under your mattress for 20 years and it’s likely to be worth LESS than the day you put it there.

Inflation’s power may also be felt with defined-benefit payments such as Social Security and pension promises. Cost of living increases with these programs can be uncertain and may not keep up with rises in your yearly expenses.

For those in their working years, we recommend a three-pronged approach to facing inflation:

1) Project your future expenses with inflation in mind, usually at 3 percent lifestyle cost increase per year.

2) Assume a conservative 1 percent to 1.5 percent average increase in Social Security benefit annually. Also make very conservative assumptions on any cost of living increases for any other pensions.

3) Save and invest regularly up through retirement, aiming to have more than enough to fill in the gap between your future income and future expenses.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

CERTIFIED FINANCIAL PLANNERTM professional John R. Berry may be reached at (940) 325-9800.

1) Bureau of Labor Statistics CPI Inflation Calculator.