Post A Comment
“It was much cheaper in the good old days”. I guess you probably heard your parents or grandparents say something like this. They were able to buy a house for half the price of a Toyota Corrolla “back in the day”. However, they don’t mention that they were making 1$/hour. So was it really cheaper back then?
The fact that prices of good keep increasing over time is inflation. This is one of the 5 risks of retirement. It is probably the most dangerous as it seems insignificant. How a 2.5% inflation can really affect my lifestyle? What I pay $100 today, I’ll pay it $102.50 next year…. Big deal!
However, the same item at $100 will be paid $209 in 30 years at an inflation rate of 2.5%. You house that worth $250,000 today will worth $524,000 based on the same principle. The worst part is that you if you retire between 60 and 65, your chances of living 30 years are pretty good! Therefore, you absolutely need to consider the impact of inflation in your calculation (this will be shown in a later post).
Where inflation come from?
Inflation is the result of a vicious circle: When economy goes well, people tend to buy more goods. Therefore, we need to produce more of everything. Since resources are limited, prices will slowly go up to adjust to the demand (economic 101). This is one of the reason why prices of good climb.
Then, employees will ask for a raise because:
#1 There is a lot of competition to get good employees
#2 The company is making profit (remember, we are in a good and healthy economy)
#3 They want to keep up with the inflation 
So if companies have to pay their employees higher, there is a good chance they increase the price of good and help the inflation rise again.
During economic crisis, we often see a low inflation rate. The economy is slowing down, people don’t buy much anymore and prices will slowly decline. The opposite of inflation is called deflation (when overall prices go down). This will be discuss in a another post as well (I don’t want to keep you forever on my blog… you still have to work to pay for your retirement ).
How is calculate inflation?
To make it simple, imagine that you take $100 and you buy specific items with it. The year after, you take the same shopping list and you calculate how much it cost. If the total is $103, this means that the inflation went up by 3% during that year.
There is a specific list of items that reflects an idea of “the normal cost of living”. This list is generally determined by a government agency and you can follow the CPI (Consumer Price Index) from your government websites:
Pingback: The Financial Blogger » Blog Archive » I Am About To Retire, Should I Withdraw All My Money from the Markets Now?