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Long-term Planning

Long-term financial planning is bedeviled by several uncertainties that are not relevant for shorter term situations. If you want your long-term plans to be even reasonably accurate, you must take these uncertainties into account.

Accounting for Inflation

Inflation is the seemingly unstoppable trend for prices to gradually increase over time. We’ve all heard the stories from old-timers about how you used to be able to get a cup of coffee for 5 cents and a good car for $2,500. On a year-to-year basis, the effects of inflation are almost impossible to notice, but when you are planning for something 10, 20, or even 30 years down the road, it becomes an important factor. Let’s look at a hypothetical example. Suppose you are 35 years old and are starting to give some serious thought to your retirement planning. You plan to retire at age 65, 30 years down the road. Also suppose that inflation has been at a relatively modest 3% per year and you expect it will remain at or near that level until you retire. Well, guess what? You will need almost $2.50 when you retire to have the buying power of $1.00 today. Inflation will continue to exert its effects during your retirement. These factors will, of course, have a major impact on your retirement finances. You can use the Inflation Effects Calculator presented in the next section to determine the future effects of inflation on your buying power.


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