318- From the Vault: Inflation Kills!

Inflation is the devaluation of a currency’s buying power. It occurs over time as the government pumps money into the economy and there’s a larger money supply buying a relatively fixed amount of stuff.

Let’s say you’re 50 years old. You want to retire in 10 years at age 60 - we’ll figure 30 years in retirement and you’re putting money into a 401(k). Let’s assume you started with $100,000 today in your 401(k) and then contributed $2,000 a year into it because you’re putting your kids through college and that’s all you can put away.

In 10 years, you would expect to make around 6% in your 401(k) (if your employer isn’t matching your money). A reasonable inflation rate is probably going to be about 3%. What this means is that in 10 years, when you’re ready to retire, at 6% with an inflation rate of 3%, you end up with $205,000 to retire on.

Let’s assume that you’re going to live on $50,000 a year. You’ve got $205,000 right now, but 10 years from now it won’t be worth that at all. Inflation affects everything including the costs of living, so your $50,000 is going to be $67,000 a year to live that same basic $50,000 a year lifestyle. Even if you keep investing the money at 5% or 6%, inflation continues at 3%.

How many years will you be able to live in retirement before you completely run out of money, spending only $50,000 a year in today’s dollars? The answer is 3 years. If you were to not learn how to invest, you’d need to come up with another $1.3 million to live on for 30 years.

If you change your 6% return to 15%, you’re going to make a lot more money. 15% is in the range of a return that’s doable for any investor. What happens then? We’re going to keep all the things the same, but we’re going to increase the rate of return to 15%. At that point, your number becomes $540,000 and you’re only short about $96,000 to make it all the way through those 30 years of retirement.

This week, Danielle and Phil discuss the impact inflation has on our investing practice. They also talk about Buffett’s solutions for “little guy” investors, and how we can set ourselves apart from others through our investing education. 

Learn how to invest with more confidence and less risk with this free Investing for Beginners in 2021 guide. Click here to download: https://bit.ly/3urGezS

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