Grow Your Retirement Savings to Keep Up With Inflation
Most of us probably strived for better-than-average grades at school and better-than-average salaries at work. That being the case, it’s kind of surprising that so many investors seem to be comfortable having “average” retirement savings for their age.
Unfortunately, if your savings are just “average,” they probably aren’t going to account for inflation and cost of living increases both before and during retirement. The hard truth is that even after you retire, your assets will need to grow quicker just to keep up with higher prices.
Not being a top performer might be OK for some things, like golf or gardening. Increasingly, however, having an average amount of retirement savings can put you at risk. With people living longer, many of us might spend more years in retirement than in working life. And don’t put any bets on the cost of living going anywhere but up. Starting with above-average retirement savings and keeping that money growing even after you’re done working could put you on far better footing in case you end up enjoying a long stretch of golden years.
Building a better-than-average savings account that works harder on your behalf is especially important for women, partly because they tend to live longer, but also because women often (but not always) end up interrupting their careers to have kids or care for parents or a spouse and may neglect their own savings. No one is saying not to take care of your family. Lots of life events can stop people—both men and women—from steadily building retirement funds. It’s important, however, to get back in the savings game as soon as possible after a life event knocks you off track, and not to break the habit. Successful savers put their future needs first and don’t see saving as a chore or a duty. They see it as a gift to their future self.
Even “Average” Inflation Can Eat Away Retirement Funds
Before considering some tools and techniques that might help blunt the blow of inflation biting your savings, here’s something else to consider: A simple mathematical principle called the Rule of 72 can help estimate how long it may take for prices to double. Just divide 72 by the rate of growth, and you get the number of years before inflation doubles. For example, at 3% inflation, it will take a mere 24 years for costs to double. For instance, the average new car price reached nearly $36,000 this year, according to Kelley Blue Book. That compares with around $19,000 in 1994, as reported by The New York Times.
Investment returns must first keep up with the rate of inflation—no matter how modest—in order to increase real purchasing power. For example, an investment that returns 2% before inflation when the Consumer Price Index (CPI) is rising at a 3% clip will actually produce a negative return (-1%) when adjusted for inflation.