Most Investors completely ignore or drastically underestimate the effect that inflation has on the future value of investments.
What is Inflation?
In 1970, a postage stamp cost ten cents. Today it costs 49 cents to buy an equivalent stamp to carry the same letter the same distance. That is inflation. To put it simply, the prices of goods and services have historically risen approximately 3%* annually over time. This tendency for prices to gradually inflate is seen in all of the world's major developed nations.
Implications for Investors
Because of inflation, investors must realize that the exact same lifestyle that costs $100,000 per year to fund in today's dollars is going to cost $300,000 thirty years from now. The average husband and wife who retire at age 60 have an 85% probability of having one spouse live until age 90. Investors, particularly retirees, need to construct a financial plan that addresses the need for tripling their income during a typical retirement.
*Source: Ibboton's Stocks, Bonds, Bills, & Inflation