How Inflation Can Increase Retirement Debt

More and more people are beginning to see the necessity of retirement planning. Setting retirement goals and then living on a budget in order to accumulate savings has become a way of life for millions of Americans. However, is it possible to carefully plan for your retirement needs to save the calculated amounts, and still end up with a financial shortfall? The answer is yes, and it probably happens more often than you would think. The culprit often turns out to be the cost of inflation, which was never factored in. The results can be devastating. Huge gaps suddenly appear in the budget which often get filled with debt. So exactly what is inflation and how could it cause this big of a problem?

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In its basic state inflation is simply an increase in the cost associated with goods. An example of this principle would be to look at a comparable purchase between two different eras. In the 1950's a bottle of Coke may have cost a nickel today that same bottle costs a dollar. Even though the product has not changed, the cost of the product has increased dramatically. This example shows the effects of inflation on a small scale but the results can often become much more dramatic.

You can see how this becomes a huge factor in retirement savings plans. It becomes essential to think in terms of future dollar values as opposed to current dollar values. Let's take a look at what happens if inflation is not factored in.

A man determined in the year 1970 that he would need a total of $1,000,000 to pay for his retirement in the year 2000. This amount would pay for all of his expenses for an indefinite period of time. However he neglected to factor inflation into his calculations. It turns out that the actual amount needed was a total of $4,536,461.07. (1) Quite a difference!! You can see how a failure to consider this factor would create a very sizeable gap. This poor man would probably not be able to retire or at the least he would face increasing levels of debt in order to cover the shortfall.

The important step is to recognize the need to factor in these increases. Actually doing the calculations is the easy part. If you're good at math simply factor in a yearly 3 - 3.5% increase. (general rule of thumb) If math is not your strong suit there are free on line calculators which can do the equations for you. Taking this extra step today will prevent you from needless headaches (not to mention debts) in the future.

(1) http://www.westegg.com/inflation/infl.cgi

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.