There has been a lot of discussion about whether people are saving too much for retirement. Numbers like $4,000,000 are causing people to question the validity of recommended retirement savings.
A reason the number is so high is the effect of inflation. Inflation is the silent factor impacting savings and income needs. To illustrate, I have created tables that show the required income needed to maintain the same purchasing power of today's income of $25,000, $50,000 and $100,000 in 15, 25 and 40 years from now.
Here is the income needed in the future when inflation is 3% .
|Equivalent income at 3% inflation|
Here is the income needed in the future when inflation is 5% .
|Equivalent income at 5% inflation|
At 3% inflation, in 40 years, one can expect to need three times today's income to maintain today's purchasing power. At 5% inflation, one would need over seven times today's income in 40 years.
Based on this analysis, I am not surprised that people in their 20s are getting estimates in the single digit millions for their retirement savings targets. Inflation is the major factor affecting those estimates.
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This is not financial advice. Please consult a professional advisor.
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