Inflation Risk
Same Money, Less Power
In 1964, a sports car cost around $2,400, or more for the convertible model at $2,800. Today, that same sports car would cost you $28,000, or $33,000 for the convertible. You can even spend over $73,000 for a fancy, top-of-the-line vehicle. The reason it costs more today is because of inflation. Inflation is when the prices for products we purchase, from groceries and gas to cars and houses, increase over time.
What Causes Inflation
Inflation happens for different reasons. It can be because of government policies, when there aren’t enough resources, or when many people want to buy something and are willing to pay higher prices.
Let’s use the car example to understand inflation better. Imagine if everyone wanted the latest truck, but the manufacturer made less of them, but some individuals were willing to pay more to get one. As a result, the price of those trucks goes up because more people are willing to pay more. This is a simplistic explanation of inflation.
How Inflation Reflects Retirement
Inflation can also affect your retirement. For example, two siblings, Sam and Audrey, are retired and live comfortably. Sam has a fixed retirement income of $50,000 annually, while Audrey’s retirement income adjusts for inflation. Assuming inflation is 3% each year, we can see how it impacts their standard of living. After just five years, Audrey can still buy the same things, but Sam’s money no longer goes as far. After ten years, Sam’s purchasing power has decreased by 14%, while Audrey can still maintain her lifestyle. And after 20 years, Sam’s purchasing power is down 44%, while Audrey’s income has increased to keep up with inflation.
To better understand the impact of inflation on your retirement, discuss the different insurance products and financial strategies with a financial professional to discover options that might work for you.
Watch the video above for more information.
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