Your retirement plan needs to outpace inflation to maintain your purchasing power and income.
The inflation rate measures price increases of goods and services and the resulting decrease in purchasing power over time — remember the 8-cent stamp? Although recent inflation rates have been relatively low, the unpredictability of inflation rates makes retirement planning more challenging.
Inflation also affects your income. During retirement, you'll want to replace the income you're earning when you retire, not the income you're earning now. As the graph shows, inflation could have a dramatic effect on income between now and retirement. With an inflation rate of just 4% a year, a retiree earning $50,000 today may need to more than triple his current income of $50,000 to $162,170 to maintain his present standard of living in 30 years.
Factoring inflation into your retirement planning may help your savings last for as long as you live.