Invested: The Rule #1 Investing Podcast

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