Money Talks, So Should You

Q&A: How will inflation affect my future savings?

Lazetta Rainey Braxton
by Lazetta Rainey Braxton , NAPFA

I remember when gas was $1.35 per gallon and a new four-door car cost $14,000. Now, I dream of gas prices staying below $4.00 per gallon and realize that car loans continue to drag down household budgets. As a Gen-Xer, I'm also concerned about how much I should save to meet future household expenses as I move toward retirement

Inflation keeps us wondering what we will pay in the future to buy the same goods and services that we enjoy today. How far will $1 stretch in 10 years, 15 years or even 20 years? Reality suggests that maintaining our purchasing power, or our ability to buy the same goods and services at today's prices, is unlikely. Thus, saving more today is crucial for supporting a good quality of life during retirement.

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The most common index for measuring the rate of inflation is the Consumer Price Index (CPI). CPI captures changes in prices for a specific list of goods and services over a period of time. Inflation suggests that prices have increased during this period, while deflation indicates a decline in prices.

Employers may use CPI to determine an annual increase in salary for employees. The pay adjustment suggests that the additional income will allow you to afford an increase in consumer prices, and hopefully, contribute more to savings. Retirees who receive Social Security income wait expectantly each year for the government’s benefit increase announcement. Inflation also affects the level of retirement income received from sources such as pensions, annuities and withdrawals from investment accounts. The fear of smaller increases in income in the face of larger increases in expenses threatens individuals of all ages.

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The biggest expenses for consideration now and in the future are educational expenses and medical expenses. These expenses historically have increased at a more rapid pace than most goods and services. Special attention must be given when preparing for and selecting schools. The costs of education relative to current and future income can drastically alter one’s savings and lifestyle due to out-of-pockets costs and long-term school loans. Reducing medical expenses will require a concerted effort by government, industry leaders, and individuals.

Many individuals are wise to consider how their savings are invested among stocks, bonds and cash. The growth in savings from contributions to your accounts and returns on your investments will be important for having the funds necessary to maintain a comfortable lifestyle. Online retirement calculators help you estimate how much money you will need to save to meet your future retirement income and expenses.

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Lazetta Rainey Braxton, CFP, is founder of Financial Fountains, a fee-only financial planning and investment management firm. Braxton is a member of the National Association of Personal Finance Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.