Avoid Inflation Deflation

Time certainly takes a toll -- both on our physiques and our savings. Like gravity to our hindquarters, such is inflation to our lifetime savings. Both have an undeniable drag on the bottom line. Or, to be blunt: As prices rise, income doesn't purchase as much.

So how do you figure out how big of a drag inflation will be in retirement? Don't leave it to chance: Incorporate inflation into your calculations.

Depending on whom you ask, what measure you use, and what time frame you consider, inflation over the past century or so has been 3% to 5% annually. Even though inflation has been pretty tame for several years, you probably remember the double-digit inflation of the '70s and '80s. Plus, the rise in medical costs -- a huge concern for retirees -- has far outpaced the overall rate of inflation. So, it's probably wise to use at least a 4% inflation assumption as you perform your retirement calculations.

As you do the math (tinker with this calculator), don't let your savings resolve droop. Steeling your savings for the inflation hit isn't complicated. The longer you'll be retired, the more you'll have to invest in securities that outpace inflation -- in other words, stocks.

You also have another option: government securities that are guaranteed to keep pace with inflation, namely TIPS and I Bonds. These are great investments because, besides the protection against inflation, TIPS and I Bonds are backed by the U.S. government, are exempt from state and local taxes, and can be bought commission-free from Treasury Direct. (Here's more reading on inflation-protected investments.)

Dividend-paying investments, like the ones recommended by Mathew Emmert in his Motley Fool Income Investor newsletter (don't miss the 30-day free trial offer), also can help defy the effects of gravity and fortify your retirement portfolio.

Now, saving for the gravity-defying buttocks lift is another matter.


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