Here’s some sobering news you may or may not be aware of: If you kept your retirement savings in cash, a dollar you socked away for retirement today won’t be worth a dollar down the road.
Why? Thank inflation. The rising price of goods and services over time eats into the purchasing power of today’s dollars. This is one reason why there’s a 2.5% cost of living adjustment built into the BlackRock CoRI™ Retirement Indexes, which are designed to help soon-to-be retirees figure out how much to save today to generate a certain amount of steady retirement income.
But inflation can hit you differently depending on your lifestyle and personal situation given that the prices of certain goods are rising faster than those of others. That’s why I believe when you’re planning your retirement savings strategy, it’s a good idea to pay attention to more than just the regular old consumer price index inflation rate. Let me give you some examples of inflation rates for different things that you may want (or need) to fund in retirement:
1. Travel inflation: Do you plan to travel a lot when you’re no longer working? I know that my bucket list of places to see once I retire is quite long. If yours is too, then you might want to pay close attention to the Travel Price index from the US Travel Association. It’s based on the consumer price index data, but focuses on various prices related to travel (think gas, airfares and hotels). Currently, airline fares are rising faster than the broader inflation measure, so future retirees may want to keep that in mind if we envision our golden years filled with lots of globetrotting.
2. Education inflation: I’ve blogged before about wanting to be a lifetime learner and using 529 plans to do so, but education inflation has long been rising faster than the general rate of inflation. So that language and cooking school I want to attend in Italy may be considerably more expensive 10 years from now.
3. Medical inflation: Even in a single category, such as medical inflation, there can be variations in the inflation rates of sub-categories. General medical inflation has finally begun to slow, but certain elements, like long-term care inflation, have continued to rise faster than the overall rate of inflation. When researching this topic, what I found most interesting of all is that sometimes you can see differences in inflation rates at a very micro level. For example, the inflation rate for brand drugs has increased dramatically since 2008. A brand drug that cost $100 in 2008 would cost $181.39 today. However, if you bought the generic version of the drug, a drug that cost $100 in 2008 would only cost $51.50 today.
So now that you’re aware of these rates, how do you incorporate them into your retirement savings plans? This is where you may want to bring a financial advisor in to help you figure out the right retirement savings amount for you. And the good news is that by investing the savings, rather than leaving them in cash, you may be able to benefit from the power of compound interest.
Source: BlackRock, The Wall Street Journal