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Identifying Income Sources Inflation & Retirement The problem with inflation is that it sneaks up on you. Inflation doesn't come along and make a deduction from your checking account each month. You don't write a check to the Department of Inflation at the end of each year. Yet the results can be disastrous if you forget to factor it into your calculations. You may begin retirement thinking everything is fine, only to run out of money later due to increased costs of living. GOOD NEWS! With most pension plans, you will receive an automatic cost of living increase. Of course, you'll need to check with your employer to see what amount that will be. Social Security also has a cost of living adjustment. Keep in mind, though, that these automatic increases, combined with your other income sources, may not be enough to protect your purchasing power after retirement. BAD NEWS! Inflation keeps working long after you've stopped working. If you retire at age 60 with income of $50,000 per year, 20 years later the purchasing power, or the standard of living of that $50,000 has been cut by about 45%. To have that same lifestyle that $50,000 in income gives you today, in 20 years you would need $90,300 per year. Inflation can have a very dramatic effect during a long retirement and it's very important that you plan for these effects. In other words, since inflation has averaged 3% per year since 1926, you should plan to have your income increase by about 3% per year during your retirement. The importance of the Retirement Pie is that it helps you identify that amount of your retirement income that you will be responsible for and leads you toward a plan of action. Let's recap where we are in the planning process: First, you have identified how much you need in retirement. Complete our Retirement Planning Quick Report for a personalized analysis. Next, you estimate your pension plan and Social Security income. What's left over is your responsibility. The portion you are responsible for can be met by saving while you are working. Finally, you determine how much you must have saved on the day you retire to meet your retirement income need. Of course, you must account for inflation. But how do I put this all together? < PREVIOUS NEXT > #38599