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When you think about investing for retirement, you’d probably consider a number of factors like market volatility, risks, liquidity and fees. But many investors tend to forget a key factor when saving money for retirement — the risk of inflation. What it costs to live comfortably now won’t be nearly the same in ten or twenty years.
For example, let’s say that you are 45 years old and want to retire in 20 years with an annual income of $50,000 in today’s dollars and that annual inflation averages 2.5% over the next 20 years. When you retire at age 65, you will need savings that will generate about $82,000 of income in the first year of your retirement to have the same purchasing power that $50,000 had 20 years ago. This amount will need to continue to grow each year in order to maintain the same purchasing power throughout retirement. When you are 75, you will need an annual income of about $105,000 and when you are age 85, you will need $134,000 .
To illustrate this example in today’s dollars, a $50,000 income will only be worth about $30,500 in 20 years when you are age 65. At age 75, it will be worth $24,000 and when you are age 85, it will only be worth $18,500.
See Also: The Importance of Higher Returns
Use this calculator to estimate how much more income you will need at retirement to keep your same standard of living that you have today.