Inflation Impact Your Purchasing Power

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Final Project Part 1
Question:
With inflation growing 3% (on average) per year, how can inflation impact your purchasing power for retirement?

This question has many questions inside of it and a lot of things to consider before answering. What is inflation? In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy (Inflation, 2012). Inflation has a major impact on anyone’s retirement pension. The cost of living today will not be the same 30+ years from now. If someone were to put $1,000,000 under their mattress today and saved it for 30 years, that person would only have about $400,000 in spending power due to inflation. So how can a person keep up with inflation? This question has no real answer because of annual percentage rates (APR’s) are always changing. Some people believe that putting your money in a traditional savings account will suffice; same for certificate of deposits (CDs). The truth of the matter is savings and similar accounts have an average of 0.80 percent according to Money-Rates.com. With inflation going up 3% per year and a savings account at 0.80%, people are losing 2.20% every year. With inflation threatening fixed income retirees, there has to be a way to beat, if not, keep up with inflation. One way is to own real estate. Home prices more than keep up with the price of living. The real price gain (appreciation net of inflation) has averaged something like 1% a year over the past century (Baldwin, 2011). Another way to beat inflation is stocks. Over the past century they have earned 6% a year, above and beyond inflation, when you include dividends. There’s many other ways to keep up with inflation but without the correct knowledge or guidance, your one million today might not be one million...
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