When you’re planning your retirement and figuring how much you’ll need each year to continue your current lifestyle, it’s very important to factor in inflation into your equation. The prime example is someone who is 10 years from retirement and trying to calculate how much they’ll need each year to continue their lifestyle. If they figure their current lifestyle requires $50,000 a year in income to sustain, they simply calculate the sum of money they’ll need in 10 years in their retirement fund to sustain that income stream for 20-30 years (however long they expect to live).
There’s only one problem… $50,000 today buys you far more than it will in ten years. Make the projections out for 30 years and the difference is more staggering. If you believe inflation is 3% a year, then $50,000 will be worth approximately $20,599.34 in 30 years. Now imagine if you lived for thirty years, that $50,000 annual income stream will slowly erode away until you’ll be living in destitution.
Don’t forget about inflation.