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Effects of Inflation
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Sure, you know that inflation can
take a bite out of your savings, but do you know how big a bite it can take?
Here's an example: Suppose you stash $10,000 in a cookie jar to pay for that
dream vacation when you retire in ten years. While your savings are doing
nothing, the price of that vacation (and just about everything else) continues
to rise. After ten years of inflation at 4% per year (the average annual
inflation rate between 1953 and 2004) your $10,000 buys only as much as $6,756
would buy today. That's a mighty big bite!
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But, you say, I wouldn't be so foolish as to put my money in a cookie jar...I'm
going to invest it! In fact, you may assume that since you are able to earn a
healthy return of 5%, investing only $7,500 today should produce more than
enough to send me on my trip in ten years time. True, that $7,500 will grow to
well more than $10,000 in nominal terms, but once adjusted for inflation, it's
buying power still falls short. What's an investor to do? Use the calculators
on this page to help you determine what your savings might buy in the future,
and whether or not you are saving enough.
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