Consider Your Personal Inflation Rate
A major component in retirement planning is determining how much you capital you will need to generate an income you can’t outlive. How much you need depends on how much you will spend. How much you actually spend will, in large part, be your ability to maintain your purchasing power. If the rate of inflation exceeds, or, at a minimum, drastically erodes your purchasing power, you could very likely spend down your capital before your time is up. It is critically important to factor inflation into your spending needs, but your inflation rate may be different than the posted inflation rate, or Consumer Price Index which the government uses as a national measure.
Inflation only impacts you when you make a purchase. How you manage your lifestyle can enable you to control its actual impact. For instance, gas prices have more than doubled for most people in the last few years. For someone who commutes 20 miles to work in an 8-cylander car, fuel inflation reduces your purchasing power. But, if you live a few miles from your work, or find less expensive modes of transportation, you won’t be affected. If you’re a technology addict and you must have the latest version of the iPad as soon as it is released, your purchasing power has to absorb the rising cost of iPads and the technology to support them.
Ways to lower your personal inflation rate and increase your purchasing power include:
- Buy generic whenever possible (i.e. food, prescriptions)
- Downsize – your car, your house
- Get thrifty – many household items and clothes can be purchased in great condition at thrift stores
- Dine out less
- Take "Staycations" – find ways to enjoy your regional surroundings in your time off