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In the nearly 10 years I have been helping people with their personal finances and retirement plans, I have not come across a single financial advisor that talks about the #1 most important factor affecting your retirement plans (Just learned Primerica has an inflation analysis tool). Most advisors don’t talk about it because it is tremendously scary due to it’s unstoppable power; there is nothing they know to do about it. It is the big scary monster in the retirement closet no one dares mention, nibbling away at your buying power, leaving you penniless, shocked and confused. Not only will I talk about it, I will explain it AND I will help you create a plan to fight and defeat this monster named “Inflation.”
The typical income for a person age 65 in 2019 is about $44,000, but the major crisis is that if you include all retirees, 50% are receiving less than $25,000 compared to a cost of living a bit over $50,000. One reason so many retirees are living in poverty is because no one warned them of the destruction and havoc inflation will wreak on their lifestyle.
Inflation is so extremely scary because the cost of living will increase a tiny bit each year on average, plus it speeds up each year, and most people don’t realize what is happening until it is too late. “How did this happen?” retirees ask their spouse (before they try to hide the issue from their kids and friends). Your retirement savings and income from that savings might be stable, but you suddenly realize way too late that a jug of milk that used to cost $3 now cost $5, or a $20,000 car now costs $60,000, or a movie ticket that cost $10 now cost $25... So how much will the cost of living increase during your retirement period?
Inflation will cause prices to DOUBLE during the average 18 year retirement (assuming 4% inflation). If you look at what inflation has done by decade going back 100 years, the typical inflation is less than 4%; the highest inflation from 1970 to 1979 was 7.25% Mathematically, the average inflation is about 3% at the time I am writing this, but the USA has recently emerged from a really long period of low to no economic growth. In my planning, I use 4% rate of inflation; for your retirement planning, which one do you want to use in my retirement planning spreadsheet? (C’mon, you knew a spreadsheet was coming right?)
Before you skip down to the spreadsheet, it is important to understand how retirement is SUPPOSED to work. Too many people think retirement savings is piling up a big stack of money, and then hoping you die before the money runs out - that’s a pretty dark way to live in your golden years, right? What I propose (and what I plan for my retirement), is to invest a big stack of money, and then spend less than my savings grows after inflation. Therefore, what you can spend in a year is how much your savings grows minus your expected rate of inflation. Income From Savings = Retirement Savings x (% Annual Growth - % Annual Inflation)
This allows your savings to grow each year with your expected rate of inflation meaning the income you harvest will also grow each year with your expected rate of inflation. Every year!!! FOREVER!!! So you can have money no matter how long your retirement lasts!!!
In the spreadsheet below, enter your data in the yellow boxes only - the other parts of the spreadsheet should be locked. Only one person can use the spreadsheet at a time, so if your numbers are changing, it means someone else is using the spreadsheet. Try again in a few minutes.
Enter the current year
Enter the year in which you intend to retire (if you are currently retired, then just use the current year)
If you retired today, what income would you want to receive from your savings? The spreadsheet will calculate how inflation will affect your desired income for you.
What rate of inflation do you wish to plan for? Type in 4 for 4%
Once you are retired, what rate of return do you think you will get? Most financial advisors will get you 5% to 8% in your retirement years.
Before you are retired, what rate of return do you think you will get? Stock market average is 10% but most 401ks and financial advisors get 7% to 9%
What is your current amount in your retirement savings?
Look at the table below - especially the column titled “Income After Inflation Withdrawn” as this column predicts how much money you can spend for that year without allowing the inflation monster to come devour your financial future!!!
Next you should experiment with different numbers - what happens if you get 15% rate of return instead of 8% - find out what different scenarios might play out for you and your family.
DON’T SKIP THE FINAL STEP - once you have chosen the numbers you want for your family - Take Action!!! Do you need to find a financial advisor that can meet your numbers? Or maybe the rate of returns you want require you to learn how to trade your own accounts? Check out our online courses where you can learn to trade FOR FREE and trade with folks who are making massive returns each year. But whatever you do, confirm your decisions with your spouse, mentors, etc. and if you are looking for individualized advice, please seek a competent, licensed financial advisor in your area. Feel free to show them this spreadsheet, and hopefully they will be willing to talk with you about the inflation monster and it’s effects on your retirement.