5 Things About Retirement and Inflation
Do you want the government to cap your retirement fund? Setting the cap at $1.6 million might seem like a reasonable amount until you start considering other factors, especially for the higher wage earners.
Why would the government consider this cap? A main point is that they believe some are using it as a savings account for beneficiaries and not for the sole purpose of retirement.
This is a more complex subject, but for now, let’s have a look at the cost of inflation over previous years so that you can get some ideas about what your retirement dollars will buy you in the future.
- What is the rate of inflation typically?
- What will your dollar buy?
- What will your dollar be worth?
- Increasing life expectancy and what that means for your retirement.
- Will your investments keep up with CPI increases?
This graph is a great example of a higher inflation scenario over the last 50 years compared to the average inflation rate. Observing a 50 year period is relevant when superannuation contributions were within that period.
What happened to the retiree’s buying power in the recession?
What effect would inflation have directly on the worth of your dollar?
Cost of Living Increases
According to the rba.gov.au inflation calculator, $100 in 1970, had the equivalent buying power of $1181 in 2015.
The Value of Future Dollars
Determining the worth of your money is impossible to predict due to factors such as varying inflation rates and the rate of return on your investments. What you can do is examine the dollar in the following charts as if your money were stagnant to prepare and invest accordingly since the cumulative effect of even low interest rates can have a big impact on your retirement.
This information is based on the US Dollar. The information is relevant as the average rate of inflation in Australia is around the 3% mark, on par with the U.S. dollar.
What will $100 be worth in the future?
The Rule of 72
Try this- The rule of 72 says that if inflation is N%/year, prices will double in approximately 72/N years. At 3% inflation, prices will double in (72/3=) 24 years, and at 2% prices will double in (72/2=) 36 years.
As you can see, the value of the dollar can be affected substantially, even at a moderate 3% CPI increase per year. What this means to you is over a 20 to 30 year period, you could lose 45% to 60% (respectively) of the purchasing power of your hard-earned money.
You can see from Table 4 that at a 5% rate of inflation, if you had for example $1000, in 25 years it would be worth about $300. Bump that up to 10% inflation in 25 years and your original $1000 would only be worth about $100.
A fixed pension over the next 20 years will decline dramatically in worth within the next 20 years, even if the current CPI does not change.
Longer Life Expectancy
As time goes on with medical advances, fewer smokers and healthier lifestyles, Australians can expect to live longer. Life expectancy has risen almost 2 years for men within the last 10. Right now women aged 65 could expect to live another 22 years while men aged 65 could expect to live another 19 years. Source: Australian Social Trends, Mar 2011.
One might consider that 20 years would be the average retirement and you are probably right, but 30 years are certainly not out of the question and some will live even longer. How will you plan for a longer life expectancy?
Can Your Investments Keep Up with CPI Increases?
It should be obvious by now that stuffing money under your mattress for your retirement is not going to keep up with CPI increases. There are a number of investment strategies that will keep you on top.
Best regards for a happy retirement.
Australian Bureau of Statistics, 2011, Residual Life Expectancy at Age 65 (a), Feb. 2014, (cat. No. 4125.0), ABS, Canberra, <www.abs.gov.au>
This article was created as general information only and not to be considered complete or advice. Individual circumstances and financial needs vary from person to person and the intent is to provide an overview. Links to other sites do not necessarily constitute endorsement or accuracy of the information contained within the referenced website.