Inflation has been slowly increasing compared to what it did in the last decade. There’s not one person who could say a 2.2 percent rate increase in the month ofMay was a rampant inflation rate. Of course, there are those that suspect the inflation rate will hit three percent before the year is out.
Since the late 1920s, inflation has risen three percent each year. However, a modest inflation rate – even at three percent or less – can affect purchasing power if it goes on too long.
According to the “rule of 72,” a three-percent inflation rule means the dollar is cut in half in 24 years. A person retiring at 60 years of age has a good 50/50 chance to live another 24 years. This rule suggests you divide the rate of inflation into 72; the answer comes up with the number of years it will take for the dollar’s purchasing power to cut in half. It can be used to figure out how long it would take the dollar’s value to double.
If you earn a six percent return, it means the investments would double every 12 years.
A Look At Social Security and FERS
The FERS annuity and Social Security retirement are indexed for inflation. The FERS is subjected to modified inflation while Society Security is subjected to full inflation. The TSP isn’t indexed for inflation, so most financial advisors follow the four percent rule. Here is how it would work:
$500,000 may sound like a lot of money that would give you a $20,000 a year income if the four percent rule is applied. A person saving into the TSP today could accumulate $500,000 in 30 days, with an average three percent inflation rate. In 24 years, the TSP balance would be $250,000. A yearly income would mean $10,000.
Looking at this means more money is needed in the TSP accounts for a comfortable retirement.
Good news though – each TSP fund has outpaced inflation since it began. Visit the TSP website and under “forms and publications,”you can find a Fund Sheet for each fund. The sheets will show you how every fund held up against inflation since it began to the latest calendar year. The inflation chart can show you what $100 would turn into if it had been invested on the first available day and what the $100 purchasing power would be when affected by inflation.
Inflation Of Each Fund As Of Dec. 31, 2017
- $100 put into the G fund when started on April 1, 1987would be about $461 today, which means $222 is needed today.
- $100 in the F Fund on Jan. 1, 1988 would be worth roughly $615 today, which means you would need $222 today.
- $100 in the C Fund on Jan. 1, 1988 is worth more than $2,000; you would have to pay $216 today.
- $100 in the S Fund on May 1, 2001is worth $444 today and $140 today would be needed to buy it.
- $100 in I Fund on May 1, 2001is worth $234, and you’d need $140 to buy it.
Remember, the funds had their own introduction dates, meaning the results are not similar. You can never have too much money in your Thrift Savings Plan.