The Invisible Thief

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Inflation:The Invisible Thief

As you should know by now (and shame on you if don’t), I always emphasize to understand your actual returns, you must look at how much hits your bank account after fees are paid off and all taxes are paid.

But that actually leaves something out which robs you of your wealth.

Inflation.

You don’t see it, hear it, or even feel it necessarily. What you have left in t

But it’s always there, gnawing away at your savings.

And not only are you subject to it, but you have absolutely no control over it.

Swell, huh?

As you may recall, the average inflation rate for over a century in the US is 3.22%. Thus, the way you’re affected by inflation (generally speaking) is not significant in the short term given how low the rate of inflation is. However, when the time frame in question is over decades, inflation can and will be significant in terms of your purchasing power.

It will clearly impact your retirement by the time—decades later—you leave your job permanently and can no longer contribute to your savings. In other words, what you have at that point is what you have left…for the the rest of your life…regardless of how much or how little it can buy you moving forward.

Scary, huh?

Realize that inflation doesn’t literally take money out of your pockets. It just makes everything more expensive when attempting to buy things. An inflation rate of 3.22% menas simply this: Something that costs you $100 in 2017 will cost you $103.22 in 2018. Now, that’s only in theory as some things will cost much more than just inflation alone (higher education anyone?), will cost the same as a company may worry that an increase in cost will cost sales of their product will plummet, or will even cost less (radical concept huh?) as technology usually costs less over time and defies easy definition/categorization making it even harder to understand what it should cost (eg, think of what your smart phone can do now as opposed to what it did even five or ten years ago).

But, generally speaking, inflation will make many things, especially items of daily living, expensive over time.

To get an idea of how much your money is worth today, there’s a slick inflation calculator (which also has some great information illuminating aspects of inflation and how to think of it) that you can use to see where you stand. It’s not the only one however. (If you clicked on the link, you’re on a terrific site that has many calculators—both financial and for many other areas of life.)

You can’t do anything about inflation as I stated before.

So why worry about it? You don’t have to, but keep this in mind…

If you ignore inflation altogether, you’re doing it at your own peril. You have to realize what it is doing to your savings since your entire Magic Number is based on what it can provide for you and your family. It’d be a damn shame if you find out that number is no longer Magic because your purchasing power isn’t what you thought it would be.

So what do you about all this knowing you can’t influence the inflation rate whatsoever?

You need to factor this into your calculations of three variables: because with inflation, as Time increases in length, then Money has to increase in amount which may then have to alter Risk Tolerance to at least a certain extent to allow for greater returns over the decades from your first year as an attending to the year you finally retire. And, if you cannot comfortably alter your risk tolerance, you either have to save more or work longer…or, worse, change your Magic Number…or, even worse yet, change what you desire upon retirement.

That’s why you want to keep inflation in mind as it should definitely factor into your retirement planning.  

If it’s not in your calculations, you may be horribly surprised at the end of your career.    

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues.

Talk to you soon.

Until next time…