The Error-Proof Portfolio: Inflation Could Destroy Your Retirement if You Don't Plan Ahead
The prospect of rising costs is a huge swing factor when setting savings targets for your golden years.
If you're planning to buy your first home in a year or a new television a few months from now, you probably don't need to worry too much about inflation. If you had budgeted $210,000 for your house but the final purchase price was $213,000, or if you wind up paying $600 for the television that was $550 last Christmas, the overage might be unwelcome, but it probably won't throw too big a wrench into your plans. (And given how home prices have been trending down during the past several years--and electronics have been getting better and cheaper for an even longer time frame--it's very likely that you'll not encounter any inflation at all in the near term.)
But when it comes to your retirement, you're not making a one-time purchase. Although it might be several years before you actually retire, not factoring in rising prices when planning for this goal can spell the difference between comfortably realizing your financial targets and scrambling to make up for a shortfall when it's too late to make a difference.
On a stand-alone basis, inflation might look like a small foe. Why worry about 2%, 3%, or even 5% per year?