There's an invisible force eating away at your retirement every day. You curse its evil ways every time you grouse, "Back in my day, you could buy popcorn at the movies for a dollar." Don't blame global warming, or nuclear proliferation, or even the paparazzi. Blame inflation.
It seems unfair that the mere passage of time can deplete your savings and give you gray hair and wrinkles. But given enough time, inflation can really sap the buying power of your savings, leaving you facing a gruesome retirement.
Take a look at the erosion it causes over a moderately long time span. Let's assume that Sally Saver invests $50,000 for 20 years. At whatever rate her money grows, those two decades are enough time to make it look like she'll have a lot of money for retirement. But consider what inflation (which has generally averaged around 3% annually) could do to her buying power.
|
Growth Rate |
Value in 20 Years |
Buying Power in 20 Years |
|---|---|---|
|
5% |
$132,665 |
$73,455 |
|
8% |
$233,050 |
$129,035 |
|
10% |
$336,375 |
$186,245 |
Two decades later, Sally's money has grown, but maybe not quite as much as it appears. She might be shocked to realize that the exorbitant $4 she pays now for movie popcorn will cost more than $7 when she takes her grandkids to see Shrek 16. Her savings won't buy as much fun as she planned.
Do some damage control
You can't prevent all the damage caused by inflation, but you can do your best to mitigate its worst effects on your savings. (Slather on the sunscreen and find a good colorist to attack the other ill effects of time.)
If you take a second look at that chart above, you'll see that you do best when your money grows at a higher rate. Your best bet for seeing your money grow more lies in just one place -- the stock market.
Everyone who wants to retire should own stock. If you're young, with lots of time until retirement, own lots of stock. Even if you're already playing golf and reminiscing fondly about the days when you had to punch a time clock, own a little stock. Always own stock. It's your best chance for beating the forces of inflation.
Here's how
Historically, stocks have returned an average 10% annually. You can tap into the action easily with a low-cost index fund that tracks the market's performance, such as the Vanguard Total Stock Market Index (VTSMX).
Individually, some stocks have performed even better at times. This year, the investors in the Fool's CAPS community expect Apple's
Join the debate, and find out which stocks may help you afford movie tickets and popcorn in your later years. There's no guarantee that stocks will serve you as well in the future as they have in the past. But if you avoid investing in stocks entirely, you'll risk crimping your lifestyle by saving more than you need, having less money in retirement, or perhaps even being unable to retire at all.
For more retirement ideas, see:
- The best way to invest your IRA;
- What you need to do to get ready to retire; and
- How you can be a millionaire.
