After a lifetime of hard work, it can be somewhat daunting to think of time spent outside of employment, particularly if it means the absence of a regular paycheck. For many retirees, planning a stable financial system to ensure their well-being through the golden years is a stressful endeavor. After all, planning for the future always involves some degree of uncertainty, which, in this case, could directly impact one's ability to keep the lifestyle they enjoy.
Many financial experts working with pending retirees stress the importance of factoring an average inflation rate into retirement planning. Given the fact that inflation can significantly undermine the value of savings, it is critical to assess how and when your savings might be impacted by this potent economic force. Fortunately, a variety of inflation charts have been developed over the past century, which effectively illustrate the history of price fluctuations through some of the country's most volatile time periods.
Over the past 100 years, the average rate of inflation in the United States has been 3 percent. That being said, average rates are much higher when assessing shorter time durations beginning in the 1950s.
Inflation Rate Definition
Although the term inflation is near ubiquitous in today's global financial reporting, it is essential that retirees fully understand the implications and immediate effects of this particular scenario. Inflation can be defined as the rate at which prices for goods and services rise over time. An "inflation rate" is an expression of this cost increase, represented as a percentage gain. The higher the percentage rate, the greater the rate of inflation over the given time period.
The internet provides a wealth of inflation rate calculators for personal use, but taking the time to understand the formula to derive inflation is equally valuable. In order to calculate the rate of inflation, you can simply divide the current point at which a price is measured by the point at which your measurements begin. The result can then be multiplied by 100 to convert it into a percentage value.
Assessing Average Inflation for Retirement
Retirement planners across the country will likely provide you with a variety of answers when it comes to defining the "perfect" inflation rate you should use for retirement planning. Although a rate of 3 percent has traditionally been used for years, data shows that average inflation rates vary significantly depending upon your frame of reference. For example, although the average inflation rate for the past 100 years has been 3 percent, an average rate of 3.9 percent occurred between the closure of World War II and 2013. Likewise, the average rate of inflation exceeded 6 percent between the years of 1981 and 1994.
With that in mind, your retirement planner will likely factor in the estimated time you will be living off of your retirement funds when deriving an average inflation rate. While it is impossible to predict how inflation rates will change in coming years, evaluating these historic trends can help you make the most educated decision possible.
Consult a Retirement Financial Planner
As always, it is in your best interest to discuss your specific situation with a financial expert if you have any questions about inflation rates and their potential impact on your finances. Your financial planner will provide you with a wealth of resources that can shed further light on this important element of your future. Although it may seem like somewhat of an opaque element of the retirement process, the chances are good that your financial planner will help you develop a strategy based on a realistic and viable assessment of future inflation rates.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.