Will my retirement nest egg be enough to live comfortably when I’m done working?
Living will be slow and my needs will be simple.
I look at the growth in my retirement savings, the cost of “things”, and my life expectancy, and wonder if my savings are sufficient to buy what I’ll need.
But, turns out, the analysis is far more complicated.
What I didn’t realize until very recently is that steady inflation is a GOAL of federal monetary policy. Each year, the Fed wants to see 2% inflation.
Policy makers think that 2% inflation represents a good balance between price stability and employment.
If the Fed gets it right and inflation is a steady 2%, the hurdle for my retirement savings just got higher.
In the course of just ten years of my retirement, what cost $100 today will cost $122 at the end of the decade. And $164 in 25 years.
This assumes that inflation rates do just what economists want them to do.
How often does that happen, I ask you?
I have to consider that inflation may not cooperate with policy makers. We may experience periods of greater inflation.
If inflation is 4%, my $100 purchase will cost $148 in ten years. And $266 in 25 years.
Inflation sucks nest eggs
I came of economic age in a period of very high inflation. While it was heady to get high interest on your savings, the cost of necessities increased faster.
The interest rate on my first home loan was 9.25%. Not so neat.
The policy talk all around me was about “fighting inflation”.
So I’ve been startled to learn that the government wants some inflation.
Inflation is a chilling lens through which to look at my nest egg.
No cost of living adjustments in DIY retirement
Social Security payments, which form the basis of most Americans’ retirement plans, are adjusted for the cost of living. So inflation isn’t as big a threat to that portion of retirement income.
But the average Social Security check is about $1250. That’s not much, even if it’s adjusted for inflation.
What it basic living costs elders by county in California
By contrast, my IRA account gets no automatic sweetener if inflation surges.
I’m responsible either for getting a bigger return on my money than inflation, or setting aside more today than would be needed, accepting that the buying power of my savings shrinks over time.
Inflating retirement resolve
OK. I got the message. I can’t calibrate the cost of retiring in terms of today’s costs. Living will get more expensive.
To be comfortable then, I need to be a devoted saver now.
For me, as a bankruptcy lawyer, the most important effect of a bankruptcy case for a client is to free up money, now going to pay old debt, and use that money to fund retirement.