“Inflation is taxation without legislation.”
A typical 65-year-old baby boomer couple has a joint life expectancy of 30 years, meaning there is a high probability that at least one of them will live to age 95. And 30 years is a very long time to plan for. Think of your own life and where you were 30 years ago, and all that has happened since—changes in career, family, where you live, and how. Think of what it may mean to spend a similar amount of time in retirement.
Many of us do a pretty good job saving and investing, but we can overlook one of the greatest dangers to a secure retirement, inflation. Historically, inflation has averaged around 3%. That doesn’t sound like much, but over time, the impact can be substantial. A 3% inflation rate means that $1 this year is worth 97 cents next year. In 10 years, $1 will be worth 73 cents. In 30 years, $1 will be worth 41 cents. This means $100,000 in the bank today could be worth just $41,000 in 30 years.
If your nest egg is not keeping up with inflation, your money disappears without you even realizing it. And while inflation is cutting your purchasing power, it is also making things more expensive. Think of a bottle of Coke that used to cost 75 cents 30 years ago and is now more than $1.50. And some items such as education, healthcare, and housing have increased significantly faster than the overall rate of inflation.
The corrosive impact of inflation is one primary reason we invest. Each year, inflation eats away at all we have earned and saved, while the stock market offers us significant opportunities to grow our wealth.