The FIRE (Financial Independence, Retire Early) movement has gained popularity in recent years as more and more people seek to achieve financial freedom and retire earlier than the traditional retirement age of 65. One important aspect of FIRE is adjusting for inflation, which is the increase in the cost of living over time. Inflation can erode your purchasing power and impact your retirement savings, so it’s important to take it into consideration when planning for early retirement.
Calculating Inflation
To calculate inflation, you need to determine the difference in the cost of a basket of goods and services between two periods of time. One common method is to use the Consumer Price Index (CPI), which is a measure of the average change in prices paid by consumers for a basket of goods and services.
For example, if the cost of a basket of goods in 2020 was $100 and the cost of the same basket in 2021 was $102, the inflation rate for the year would be 2%.
Adjusting for Inflation
Adjusting for inflation is important for FIRE because it ensures that your retirement savings will maintain its purchasing power over time. Here are some examples of adjusting for inflation:
Factor in inflation when calculating your retirement savings goal: If you’re aiming to retire in 20 years and expect inflation to average 2% per year, you would need to factor in the 2% inflation rate when calculating your retirement savings goal.
Include inflation in your retirement budget: When planning your retirement budget, be sure to include the impact of inflation on your expenses. For example, if you expect the cost of food to increase by 3% per year, you would need to factor in the 3% inflation rate when calculating your monthly food expenses.
Invest in inflation-protected assets: One way to hedge against inflation is to invest in assets that are designed to protect against inflation. For example, Treasury Inflation-Protected Securities (TIPS) are bonds that are tied to the Consumer Price Index and offer a guaranteed return that is adjusted for inflation.
Conclusion
Inflation can have a significant impact on your retirement savings and purchasing power, so it’s important to take it into consideration when planning for early retirement. Adjusting for inflation can help ensure that your retirement savings will maintain its value over time, so be sure to factor it into your calculations and budgeting.
*We are not financial advisors and only present our findings. Please do your own due diligence and what you feel you can make work in your own unique situation.