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The Wonder – and Horror – of Inflation

By JLP | March 6, 2008

Being relatively young, I can only begin to observe the long term effects of inflation. I can remember when a stamp only cost a quarter, a gallon of gas cost $1 or so, and when public college tuition cost “only” a few thousand dollars.

But it facinates me to hear my parents and especially my grandparents reminisce about how much cheaper things were when they were younger. They can remember when a nickel and a dime were “real money” which would purchase a whole meal, a gallon of gas, a movie ticket. You can’t buy anything for a nickel today, save perhaps a piece of gum.

Consider these statistics: In 1950 the average income was $3,216, the average car cost $1,350, a stamp cost $.03, and the average house cost $8,450.

Of course that was back when a “millionaire” was something to which few people even aspired. Millionaires were members of the elite wealthy, people who could live a luxurious life of leisure from stately mansions in Manhatten, shopping freely on Park Avene. This fact amuses me when I watch old movies. The idea of a “billionaire” was never even conceived.

It also amuses me when I think about all the average people today who plan and hope to become millionaires (myself included). At least we’re all likely to get there! Money Magazine just published its most recent “Millionaires in the Making” couple – a pair who collectively earn $65,000. They are on track to have $1.3M by retirement, which sounds great until you consider that $1M will be worth only about $305,000 in 40 years (the couple are in their 20′s). I don’t know about you, but I wouldn’t be comfortable retiring today if I only had $305,000 in the bank.

It’s overwhelming (and a little bit scary) when you think about the sheer volume of dollars a young person today needs to accumulate to maintain our current standard of living all the way through retirement (especially considering we’ll all probably live to be at least 125 by then – which I actually read in Time a year or so ago). Do you ever think about how weird it will be when the average home costs $1,000,000, a gallon of gas costs $15, and a standard car costs $100,000 (assuming we’re not all driving hovercrafts by then)? Many of us may see that in our lifetimes.

Of course the average salary will have gone up as well, along with retirement contribution limits. Hopefully we’ll all be saving a lot more. Soon we’ll all be millionaires! At which point the designation won’t mean much, of course–by then the real go-getters will all want to be penta-millionaires, and then deca-millionaires…

More from Meg at The World of Wealth

Topics: Generation Y, Retirement Planning | 8 Comments »


8 Responses to “The Wonder – and Horror – of Inflation”

  1. Ken Says:
    March 6th, 2008 at 5:56 pm

    I am Ken, Seattle, WA on the posts at CNN. I was the first to point out that $1 million will be nothing by the time they retire.

    I am glad that my wife and I are on pace to have a million dollars in todays dollars at retirement.

  2. traineeinvestor Says:
    March 6th, 2008 at 7:16 pm

    Inflation is scary. If you get your assumption about the long term rate of inflation even slightly wrong, the effect on your retirement planning can be awful.

    The good part of inflation is the effect on your borrowings. The real value will be eroded over time just as cash in the bank will.

    While it is true that salaries and benefits should increase with inflation, I would not expect them to increase as quickly. If they did, that would be a departure from historical experience.

  3. No Debt Plan Says:
    March 6th, 2008 at 9:13 pm

    You are right that $1million today is worth $305,000 in 40 years.

    But! If wages increase at or near inflation, the amount of money saved for retirement should go up as well. That $1.3 million is in today’s dollars, not 40 years from now dollars. In 40 years, it might be worth $4.2 million (1.3 mill/30.5% from your numbers).

    Does that make any sense? Am I remotely correct…?

  4. keith Says:
    March 6th, 2008 at 9:45 pm

    I wonder if, when everyone is a millionaire, we will finally get rid of the penny.

  5. Lazy Man and Money Says:
    March 7th, 2008 at 12:50 am

    In some parts of the country the average home is already around $700,000. That’s what I’ve found in Northern California.

  6. kitty Says:
    March 7th, 2008 at 11:52 am

    In Westchester County, NY, an average house price is $690,000. This is actually up from the previous year although a little down from a couple of years ago, I guess we aren’t that affected (yet) by the crisis.

    This means that if you are young and looking for your first home, you may have to look at condos (300K for a one bedroom to 400K for townhouse w/out garage to 600K for a townhouse with garage) or co-ops (170K for a one bedroom or 250K for a two bedroom).

    But this also means that if you are lucky enough to have bought at the bottom of the 90s housing slump, you could have a lot of money in equity alone. If you count anybody with a net worth of 1 million include primary residence as “millionaires”, a lot of those with huge equity will qualify. Except for if the prices drop, the net worth will drop as well. If you exclude primary residence, it’ll become more difficult.

    Additionally, I have problems with including complete 401K in net worth since a huge part of it really belongs to the government…

  7. TF Miser Says:
    March 7th, 2008 at 6:49 pm

    Most people retiring now have less than $305,000 in the bank. I couldn’t find any current figures but the median value of retirement savings of 55 to 64 year olds in 2004 was $88,000. Are all these people going to have an uncomfortable retirement? I doubt it. I think people overestimate how much retirement savings they need. Of course that is better than underestimating.

  8. donovan Says:
    March 8th, 2008 at 2:18 pm

    Meg rightly observes \”The Wonder – and Horror – of Inflation\”, but is understandably bewildered at the true nature of \’inflation\’.

    ______________

    Ever higher prices are merely the \’result\’ of inflation.

    \”Inflation\” itself is a deliberate, covert government policy of devaluing the currency (Dollars) by recklessly \’creating\’ huge amounts of new money out of thin air.

    It is legalized counterfeiting, short & simple — Federal politicians quietly counterfeit money for precisely the same reason as any other counterfeiter — it\’s free money to spend as they like.

    Most all Americans would quickly scoff at the notion that their federal public-servants had either the will or ability to run a huge counterfeiting operation. And that national counterfeiting operation is so enduring & profitable because most citizens are indeed clueless about it. They see higher prices and weaker Dollars, decade after decade — but can only work harder and wonder what\’s really going on in the world.

    { \”It is well enough that the people of the nation do not understand our banking & monetary system for, if they did, I believe there
    would be a revolution before tomorrow morning.\” — Henry Ford, Sr }

    ______________

    The U.S. Federal Reserve System (central bank created in 1913 specifically to inflate the U.S. Dollar) controls the money machine. When it buys government debt, it creates new money from nothing to make the purchase. Federal politicians then spend this newly counterfeited money into circulation as they like. This how Congress can continually spend vast amounts of money each year, while in debt for Trillions that it can never repay.

    These huge amounts of phony money eventually bid up the general prices on everything — but only those who got the phony money early in the game get to spend it before general prices rise. The cycle repeats as phony money is created and prices slowly respond. But the cycles end eventually as inflation snowballs, the public finally realizes the scam and refuses to hold the funny-money anymore — unloading it on anything they can still buy.

    The official, inflated funny-money always ends up as worthless wall-paper. It will happen here, too.

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