How inflation will affect your retirement

December 1, 2007

Whether your retirement is years away or just around the corner, inflation is destined to exert a major influence on your future economic well-being.

Key Points

With all of that drama unfolding on a daily basis, it's easy to lose sight of the fact that wide variations in stock market performance are and always have been a normal part of the Wall Street experience. Over the long term, the overall trend has always been up. Except for investors who find themselves in need of liquidating stocks during a downturn, such market volatility isn't reason for alarm.

A different economic factor in retirement planning that offers far less day-to-day drama is inflation. Except for that painful spike in gasoline prices, chances are that you haven't been giving much thought to inflation lately. With overall inflation coasting around 2.5% to 3% for the last few years, there are other, more important, economic considerations in your life as a busy physician.

The effects of inflation are complex

If you've been around long enough to remember McDonald's 15-cent hamburger, you may feel nostalgic when you shell out 89 cents for that same treat today.

Surprise. That same hamburger would sell today for about $1.05 if it kept pace with inflation. That popular product is actually cheaper today than it was 50 years ago.

However, that's a rare exception. Most products and services we buy keep pace with or exceed the average inflation rate.

The only meaningful way to compare prices from one period to another is to compare them with the general price level of each period or to the percent of average wages necessary to pay for the item during each period.

Direct comparisons can be misleading

Obviously, the bargain-price phenomenon evident in such products as McDonald's hamburgers doesn't extend itself throughout your personal universe of products and services. During the Great Depression, a first-run movie ticket sold for fifteen cents. How does that compare with the tab at today's multiplexes? With inflation factored in, a movie ticket should cost about $2.10 today. With ticket prices now running at $6.50 or higher, it's costing us a lot more to visit the local movie emporium than it did back in the dark days of the Depression (and don't forget today's $2.50 Coke that used to cost a nickel).

Any physician paying for malpractice insurance today is well aware that costs have risen at a pace far in excess of the average inflation rate. College tuition is another of today's costs that is mind-numbingly more expensive than in days of yore.

So what does all this have to do with your retirement? Plenty.

Inflation never lets up

The rate of inflation can vary wildly from one year to the next. However, regardless of the variations, inflation continues its work relentlessly year after year.

Even that harmless-seeming inflation rate of recent years takes a significant toll over time. After 10 years of 2% inflation, that dollar bill in your pocket now will be worth only 82 cents in today's dollars.

How inflation will affect your retirement

Here's an example of how inflation affects your life right now: If you paid $60 for a week's groceries in 1985, you're paying about $109.67 for those same items today.