Inflation and Your Retirement Plan

November 30, 2005

I’ve been working my way through Lee Eisenberg’s The Number. For those of you who may not know, “The Number” is the amount of money you will need to have in order to fund your retirement. The book will be out in about a month. I highly recommend you check it out. I hope that Lee’s publisher does a good job getting the word out on this book because I think it is EXTREMELY important for people to addressing their retirement needs.

The book got me to thinking about how one should look at their retirement needs. Let’s say that you are now 40 and are currently making $100,000 per year. You are living comfortably and are pretty certain that you would like your lifestyle to remain basically the same when you retire in 20 years. The only problem with that is that assuming a 3.5% inflation rate over the next twenty years, $100,000 will only be worth $50,000. In other words, you will need $198,979 in income to equal what $100,000 is worth today.

Take a look at the chart below. In the left hand column is the number of years until retirement. Assuming the different inflation rates, the grid shows you how much you might need in income to equal $100,000 in today’s dollars. Of course, the longer you have until retirement, the more income you will need.

Expected Inflation Rate

No. of Yrs. Until






























Next time, we’ll discuss what kind of Number you will need in order to fund your desired income level.

3 responses to Inflation and Your Retirement Plan

  1. I read a Fortune Magazine with a similar theme (“what is your number?”) and it really got me thinking.
    I have radically upgraded my number so that a) I don’t stop saving and b) I actually have enough.


  2. Can the effects of inflation on the nominal retirement income target be mitigated by increasing one’s annual investment amount by the inflation rate? Many on-line calculators assume that you are going to invest the same amount every year. But, given the chart JLP has provided, doing so might be a sure-fire strategy for missing the target.

    A way to approximate the inflation rate would be to hold the line on fixed and variable household operating expenses, and allocate bonuses, cost of living adjustments, and raises first to increasing the annual investment amount. Such a strategy may not dramatically increase your standard of living in the short term. But, you have to ask yourself: what are you working for, and how long do you want to be working?


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