Why Inflation Isn't as Bad as You Think
When talking to baby boomers, it's not uncommon for the discussion to move to how much cheaper things were back in the day. "Coke was just a nickel! Hamburgers were selling for 10 cents!" The natural progression in the conversation, of course, will lead to inflation and how destructive it could be to our retirement plans.
Yet, inflation isn't nearly as bad as most people think it is. Here are five reasons why inflation won't be as devastating to your retirement savings as you might think. (See also: How to Live With Inflation)
1. A Significant Portion of Your Financial Assets Are Actually Inflation Adjusted
You can flat out invest in TIPS, but even stocks will keep up with inflation in the long term. This is because while inflation initially affects a company's bottom line through cost increases, the company will eventually pass that onto consumers by raising prices.
Your house is another asset that keeps up with inflation fairly well. This is due primarily to rent and wage increases, which will both push up home prices in the long run.
2. Sometimes Inflation Can Work in Your Favor
Tax brackets, for example, are inflation adjusted so that you need a higher income to be taxed at the higher rates. In other words, you will eventually have a smaller tax bill through time unless your income actually increases. Retirement fund contribution limits also increase with inflation, which means that you can put more away for your future without Uncle Sam grabbing a share first. The maximum limit you can put in a 401(k) increased by $500 in 2012 due to inflation, allowing you to defer taxes for a larger amount.
3. Inflation Probably Isn't Even Why You're Spending More
You are likely spending more because you inflated your lifestyle. Instead of a landline, you got a cell phone, and eventually a smart phone with that extra data plan. You used to eat ramen, but you've upgraded to that Fettuccine Alfredo at a fine restaurant. You used to clean with a reusable cloth, but you are using sanitized wipes.
It's not limited to upgrading your life either. When you weren't making as much money, you might've gone out of your way to switch your cable TV provider every few months to take advantage of the broadband promotions companies offered. But do you still do this?
The good news is this is that there are likely alternatives you can find to cut costs if you truly have to do so. And since you already know you can live happily without the recent luxuries, you can rest knowing that you will be fine.
4. Some Things Are Actually Less Expensive Than Before
Not everything always goes up in price. Technology, for example, seems to have a downward trend. And I know this is bad for me, but I've loved the McChicken sandwich ever since I was a little kid. On the occasional trip to the fast food joint, I'm now paying $1 for each sandwich as opposed to $2.50 in the 90s.
5. A Significant Portion of Your Expenses Can Be Fixed
The monthly mortgage payment is a pretty big expense for most households, but you can choose to fix this cost for 30 years by applying for a 30-year fixed mortgage. You never know — inflation may get so out of control that all you have to do to satisfy your monthly mortgage payment in a few decades is skip buying a few cases of Coke a month.