[Continued from ARFS - Introduction - Oh My Secured Social Security!]
What cost $100 in 1975 would cost $374.56 in 2005.
Also, if you were to buy exactly the same products in 2005 and 1975,
they would cost you $100 and $26.70 respectively.
From our investing perspective let us say we dropped a $100 bill in a cookie jar in 1975. Fast forward. Miraculously in 2005 we discovered that bill intact in the jar. Though it still is a $100 bill, but there is a significant difference. Whatever we could buy with it in 2005 could have been bought with just $26.70 back in 1975. The value of $100 dropped from $100 to $26.70 in 30 years with respect to the purchasing power in 1975! That is a 4.5% annual inflation drop.
Figure 4 shows the annual inflation rate and 12
Figure 4: Annual Inflation Rate
[Please click on the above picture to see a bigger and clearer version of it]
After looking at various inflation numbers of the past we decided to factor in an inflation rate of 4% for our financial planning. Thus we have to at least grow our money at 4% just to maintain its current purchasing power.
To get a realistic picture, let us assume that we could retire today if we had $2 million in liquid net worth. Now at 4% inflation rate we would need $4.38 million at the end of 20 years or $6.49 million at the end of 30 years to give us purchasing power equivalent to $2 million in today’s value! We better be serious and start early.
Information and Tools
- Historical inflation data can be found at: http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx
- Inflation calculator: http://inflationdata.com/inflation/Invflation_Rate/InflationCalculator.asp