Inflation
It’s very important to factor in inflation when it comes to retirement planning. After all, when retirement is very far away and you want to save $1 million for it, then $1 million won’t mean the same thing in 20 years as it does now.
When we’re talking about long periods of time, inflation has averaged around 3% annually, even if in some years it can change. This kind of rate might shrink the buying power of your money in half over a span of 25 years.
So here’s how you should include inflation in your plans: for example, you have another 20 years until you retire, and you plan to live on the equivalent of $50,000 income in today’s money (during retirement).
Well, you can take the number 1.03 and raise it to the 20th degree, which will be 1.81. Then you multiply this number by the amount of money you’ve decided to live on (in our case, $50,000), and you’ll get $90,306. A big number, right? Well, that’s the actual number you’ll end up with in 2043 with the same purchasing power as $50,000 in 2023.
