Inflation - It Erodes Your Savings and Investments

Inflation is a sustained increase of prices. Inflation need not be a harmful if your income keeps up with it. But if you're on a fixed income or your income increases less than inflation, inflation can rob you of purchasing power because everything costs more.

For example, assume you are retired and live on $30,000 per year. Further assume the inflation rate is four percent per year. What will your expenses be in five years? The first table shows various inflation multipliers that tell you how fast prices will rise for different rates of inflation.

Look at the column with the 4% heading. Then go to the row labeled 5 years. The inflation multiplier is 1.22. That means your expenses in five years at 4% annual inflation will be 1.22 times the year one expenses.

So to obtain the year 5 expenses, multiply the year one expenses by 1.22 to get $36,600 ($30,000*1.22). Therefore, your expenses increased by $6,600. After year 10 your expenses will be $44,400 ($30,000*1.48).

Inflation Multipliers
Rate of Annual Inflation
Year	2%	4%	6%	8%	10%
1	1.02	1.04	1.06	1.08	1.10
2	1.04	1.08	1.12	1.17	1.21
3	1.06	1.12	1.19	1.26	1.33
4	1.08	1.17	1.26	1.36	1.46
5	1.10	1.22	1.34	1.47	1.61
10	1.22	1.48	1.79	2.16	2.59
20	1.49	2.19	3.21	4.66	6.73
30	1.81	3.24	5.74	10.06	17.45
40	2.21	4.80	10.29	21.72	45.26
50	2.69	7.11	18.42	46.90	117.39

The following table applies the inflation multipliers to a starting expense amount of $10,000. A $10,000 expense grows to very large values at high rates of inflation that last for a long time.

$10,000 Adjusted for Inflation
Rate of Annual Inflation
Year	2%	4%	6%	8%	10%
1	$10,200	$10,400	$10,600	$10,800	$11,000
2	$10,404	$10,816	$11,236	$11,664	$12,100
3	$10,612	$11,249	$11,910	$12,597	$13,310
4	$10,824	$11,699	$12,625	$13,605	$14,641
5	$11,041	$12,167	$13,382	$14,693	$16,105
10	$12,190	$14,802	$17,908	$21,589	$25,937
20	$14,859	$21,911	$32,071	$46,610	$67,275
30	$18,114	$32,434	$57,435	$100,627	$174,494
40	$22,080	$48,010	$102,857	$217,245	$452,593
50	$26,916	$71,067	$184,202	$469,016	$1,173,909

You must account for inflation when you determine your retirement expenses and the size of your retirement portfolio. If you ignore the effect of inflation, you'll increase your chances of running out of money after you retire.

To learn more about inflation and obtain the current inflation rate and historical inflation data go to InflationData.com.

Inflation and Purchasing Power Calculators

You can use the inflation calculator and the purchasing power calculator to help you study the impact inflation is likely to have on your finances. Suppose that you needed $60,000 for your first year of retirement. How much money would you need in 20 years to maintain the same purchasing power as today? The calculators will provide the answer.

Related Articles:

Consumer Price Index and Inflation Rate Data and Cost of Living Calculators
How Long Will Your Retirement Money Last?
Inflation Calculator - Save Enough to Account for Inflation
Purchasing Power Calculator - See How Inflation Erodes Your Purchasing Power

Updated March 15, 2008.

Inflation - It Erodes Your Savings and Investments

Inflation - It Erodes Your Savings and Investments