The cost of retirement will likely go up every year due to inflation. This means that the money you save now won’t buy as much when you retire. For example, say you buy a set of golf clubs today for $300. In 2026, assuming a four percent rate of inflation, that same set of golf clubs would cost you $739. (Just imagine what green fees will be by then!)
Adjusting for the effect of inflation is essential, but tricky, because inflation rates vary from year to year. In 1980, the rate of inflation was a whopping 13.5 percent. In 1998, it was only 1.6 percent. The current inflation rate is 3.0 percent, but it varies over time (Department of Labor, “Savings Fitness”). Thus, it is difficult to figure out exactly what the inflation rate will do to the value of your retirement dollar. It is always safer to figure a higher rate of inflation when calculating how much you need to save for retirement and have your money buy more than previously thought. (That way, you can go for the titanium Callaway clubs!)
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