Inflation Calculator - Save Enough to Account for Inflation
Nurturing your financial nest egg is an important goal for all investors, particularly if you are near retirement or already retired. Hopefully, savvy investing along with prudent spending and budgeting will prevent you from draining down your retirement money too quickly. But one factor that no one can control is the constant increase in the price of goods and services caused by inflation. Even the most financially-wise people wince at the thought of inflation eating away at the purchasing power of their savings and investments.
Just about everything that we buy goes up in price with time. For example, an item that costs $100 today would cost $134.39 in ten years given a three percent inflation rate. In 15 years, the same item would cost $155.80, or over 50 percent more than today.
Another way to understand the impact of inflation is to determine the value of today's dollar in the future. For instance, $100 that you have today, in 15 years given a three percent inflation rate, would be worth only $64.19. Inflation over time does erode the value of money.
Use the Inflation Calculator to help you study the impact inflation is likely to have on your finances. Suppose that you needed $60,000 for your first year of retirement. How much money would you need in 20 years to maintain the same purchasing power as today? Assume the annual inflation rate averages 3%.
The first result (Reduced Amount) is $33,220.55, which represents the value of $60,000 in 20 years. The second result (Required Amount) is $108,366.67, which is amount of money that you need in 20 years to match the purchasing power of $60,000.
You can see how inflation reduces the value of your money in the future. Therefore, you need to factor it into your nest egg planning and implementation.
The reduced amount is computed using the standard present value formula:
Reduced amount = amount/(1 + inflation rate)^number years
The required amount is computed using the standard future value formula:
Required amount = amount * (1 + inflation rate)^number years