The effects of inflation should be taken into account when we want to plan for the longer term.Take this example below:
Mr James, 30 years old, after 5 years of savings have accumulated around $10000. He saves $300 a month which makes up to $2400 a year. He plans to retire at age 65. His savings target is to have $100,000 by age 65.
30y/o = $10000
31y/o = $10000+$3600=$13600
32y/o = $17200
:
:
65y/o = $126,000
Based on today's calculation, if he were to save $300 a month, he would have $126,000 by age 65.
However if you were to take into consideration the effects of inflation, the numbers will be very much different.
Inflation in Singapore for the past year is at 5.5%.Say we take the average of 4% inflation year on year, $126000 value today would be $49,542 by the time James is 65.
To combat the effects of inflation, to get a value of $126000 in 35 years time, you need to save for $315,215.
Therefore whenever we do our own planning, you have to take into account inflationary concerns as this can erode your savings for the future.
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