Here is why it matters to you

Let's assume the current increase in gasoline prices and the resulting pressure on the household goods decrease your savings by $100 a month. Taking the default values of Prosperity's Wealth Manager, the monthly contribution to your portfolio decreases from $500 a month to $400 a month. Figure 1 shows you the Wealth Manager simulation with $500 investments a month, and Figure 2 shows you the loss of future wealth due to the inflation pressure.

Figure 1 Normal retirement savings scenario

Figure 2 Depleted retirement savings due to decreased monthly contribution

As you can see from Figure 2, the simulation shows that at the age of 84, the retirement savings are turning negative, meaning you do not have money anymore.

However, your salary should increase with inflation, so let's assume the increase of salary is not 2% per annum, but 3% per annum to compensate for the inflation increase. Figure 3 shows you that your retirement savings are better off if from next year on you increase the amount you contribute to your retirement portfolio. At the age of 85, you will still have $92,000 left, as can shown from the figure. Everything is fine, you will tell me, but let's have a look at what inflation does to your retirement.

Figure 3 Thankfully salaries catch up

Here comes the bad news

Double clicking on the retirement icon under the graph will open a pop-up window with the retirement parameter settings. The last parameter is the inflation to be taken into account for the retirement expenses, as shown in Figure 4. Indeed, the expenses of $3,000 per month are in today's dollar terms, in 35 years time, the cost of living will have increased. To have a quality of life costing you $3,000 today will cost much more 35 years down the road.

Figure 4 Retirement parameter settings

So let's change the inflation parameter from 2% per annum to 3% per annum, the results are disastrous as you can see from Figure 5.

Figure 5 The impact of inflation on the retirement living costs

This is why you should worry about inflation. To be able to save enough money to counter inflation, you now need to contribute $900 per month! And this while the inflation today decreases your capacity to save! Individuals like you and me are trapped by both ends. There are some solutions to it, but that will be for the following articles

Figure 6 Defining how much more to save to achieve the same retirement goal