Luckily for the workforce, wages/salaries tend to rise along with price levels. That is, people tend to get annual raises even without getting promoted. On the one hand, this is good. It makes it so that most people can maintain a relatively stable standard of living.
On the other hand, our annual raises have taught many of us that inflation is something we don’t have to worry about. We’ve been lulled into a false sense of security.
I saved an article from Money magazine a few months ago in which the writer quoted a study stating the following:
- If you’re 40 now, there’s a 55% chance you’ll live to be 85. In order to not run out of money by age 85, you’d have to have $2.5 million before you could retire.
- If you’re 40 now, there’s a 36% chance you’ll live to be 90. In order to not run out of money by age 90, you’d have to have $3.6 million before you could retire.
That’s a lot of money! A couple thoughts:
- The study assumes you want to retire at age 65. I know plenty of people who plan to retire younger than 65. If that’s your plan as well, you’ll need even more money.
- For those of us younger than 40, our required amounts would be even higher.
It’s easy to underestimate the amount of money that we’ll need to have saved before we can retire. It’s easy to write off inflation as insignificant. Unfortunately, that’s a big mistake.
So what should we actually do in order to combat the power of a lifetime of inflation? Two things, I think:
- Take the time to work out a reasonable estimate of how much you’re going to need in order to retire, based upon your personal information (spending level, age, etc.)
- Come to terms with the fact that you’re going to need a heavy allocation to stocks in your portfolio (even after you’ve retired!) in order to stay ahead of inflation.