The Impact of Inflation When Using Financial Planning Tools

Some good financial planning tools. i.e. software, will permit you to enter your anticipated rate of inflation. This is a vital piece of information because even small modifications may significantly impact your retirement savings balance and retirement financial success. How much can the rate if inflation influence the outcomes of the financial planning tools?

Let's look at the next instance. The following is the information that John Doe (our sample future retiree) enters in to the financial planning tools:

Age: thirty-five
Yearly revenue: $40,000
Retirement age: 65
Monthly wages following retirement: $2,000 (for 5 years)
Age at which he'll claim Social Security income: 67
Social Security income: approximated by the calculator
Anticipated inflation rate: two percent
Annual rate of growth in revenue: 1.5 %
Age at death: 93
State and federal tax rate prior to retirement: 33.8 percent
State and federal tax rate after retirement: 15 %
Initial living costs (first 15 years of retirement): $3,000/month
Living costs afterwards: $3,400/month
Future purchases: $10,000 investment in 2 years and $20,000 investment in five years, both averaging 8% returns
Retirement investments: current balance of $20,000 in a 401(k) plan with an 8% return rate and investing $200/month into this program

When I viewed the graph that the financial planning tools gave for John, it revealed info concerning how many months into retirement his savings will last at numerous inflation rates. The information on the financial planning tools highlighted the following:

2 % inflation rate: approximately three hundred and forty months worth of savings
3 percent inflation rate: roughly 240 months worth of savings
4 percent inflation rate: approximately one hundred forty months worth of savings
6 % inflation rate: roughly 50 months worth of savings
ten percent inflation rate: Roughly ten months worth of savings

As you may have been able to determine, the chart showing retirement savings longevity on the financial planning tools plunged significantly after the 2% inflation rate mark. Even in the typical 2 to 4 percent inflation range, the impact of modifications are radical. At 2%, John's assets would last a little past his 93rd birthday (three hundred and forty months = twenty-eight years) to run out of cash if he retired at the age of sixty-five with his present retirement plan. Nevertheless, a relatively little change of one percent in inflation on the financial planning tools lowers that age to eighty five when he runs out of money. Bump that inflation rate up to 4% on the financial planning tools and John is currently on the right track to run out of cash prior to his 77th birthday. He'd truly be gambling with his future at that time. Above the 4% mark, the graph does not plunge as greatly, indicating that a percentage point increase has less of an effect at that point. However, inflation will have already reduced his the value of his savings substantially.

Certainly, we can all expect that the inflation rate by no means averages 10%. If it did, anyone who hoped to retire would have a constant battle to fight and would need to improve their savings rate tremendously. That rate simply is there to demonstrate that a nightmare situation would decrease the longevity of John's retirement savings to a catastrophic level. If you weren't already aware of this, are you right now starting to see the real picture of how essential inflation is to anyone's retirement savings?

In conclusion, it is vitally important for any financial planning tools which you use to account for inflation. It's more suitable that the financial planning tools which you select doesn't use a set rate of inflation and lets you tinker with the numbers. If you'd like to see how inflation might affect your retirement savings, plug in your own numbers to the described financial planning tools or financial planning tools of your choice.