Regular Saving, Compounding and Inflation (Retirement) Case Solution
Impact of Regular Saving, Compounding and Inflation
Inflation can be defined as a sustained increase in the general prices of goods and services. Thus Inflation significantly affects the savings or retirement investment of an individual. Inflation doesnâ€™t directly affect the savings but indirectly. The impact can be explained that inflation increases the prices of goods, which demands higher purchasing power from the consumers(Morgan, 2016). Thus a product that is available earlier at a specified price will be, after inflation, available at higher price. In general circumstances the purchasing power of consumers gets balanced with the dearness allowance or cost of living allowance from the employer. But when an individual make savings or invest money, for any purpose especially for retirement, the situation is different. The interest that is being earned on the money invested increases the money in lower rate than the rate of increasing prices due to inflation. Thus the personâ€™s purchasing power decreases. As an example, let a person has planned to buy a car worth $1 million. He starts saving the money in a fixed deposit account. Later on when the savings accumulate to $1 million, the cost of that car has been increased to $1.2 million due to inflation. Thus, now the person needs more money to buy that car.
Another impact of the Inflation is after the retirement. The savings and investment made are increasing at lower pace while inflation is rising at higher pace. The budgeted plan after retirement will get affected by the inflation. Such that a person planned to expend $10,000 monthly for coming 5 years. That expenditure plan cannot be meet at least after some months. This is because of inflation the goods that the person purchase is on increasing price trend. The person will not be able to buy the required goods and necessities at the same budgeted prices. Thus inflation affects the budgeted plan as well.
The effect on budget can be seen from the retirement nest or plan that has been created. Here the inflation has been taken at the rate of 1.10%, which is the current inflation rate of U.S. It is assumed that the person will make the investment in a long term saving account that has the interest or rate of return on investment fixed at 6%. Thus analyzing the calculations it can be seen that the routine planned withdrawals has been increasing year by year. This is because of the inflation the need of money is increasing year on year. Inflation is increasing the prices of the commodities and thus a person will need to withdraw more from the investment or savings to meet its expenses. From the annual withdrawal percentage it can be seen that the rate of withdrawal is increasing year by year. On the other hand the investment rate is same at 6%. Thus the person is depleting its investment at higher pace. The annual withdrawal is at 7% initially which gets increased to 9% within 10 years. Analyzing further, it is seen that the person will not be able to use its savings at the year 26. He will be left with no savings because he has consumed all the savings already. …………………
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