In “Tax By Inflation” we wrote:
The danger with short money is that it will almost certainly depreciate by inflation.
Most young people don’t understand inflation as well as their parents and grandparents. You have to either be a student of monetary history or an old movie buff who pays attention to the actor’s reaction to what something used to cost.
To illustrate the insidious effects of inflation here are some statistics from the official inflation numbers:
- Someone retiring in now in 2014 with $1 million at age 65 can safely withdraw $43,600 a year. [See safe withdrawal rates in retirement]
- However, today’s 20-year olds will need over $7 million to have that same lifestyle when they retire. [The inflation rate compounded for 45 years or 1.045^45 = 7.248]
- In 1970 they would only have needed $166,000 in retirement to have a similar purchasing power for the rest of their life. [Official CPI Inflation Calculator]
That is the insidious effect of government-induced inflation. As we wrote in the original article:
Inflation steals half the value you store in dollars every 16 years. And actual inflation, as opposed to the official numbers, is probably about 2% higher.
Most people wrongfully worry more about the effects of short term market volatility and less about the effects of long term inflation.