Understanding the Basics

Inflation: The Incredible Shrinking Monster

Inflation is the increase in the nation's overall price level. It is a measure of how much prices are going up. Inflation is usually stated as a percentage and is usually measured by changes in the Consumer Price Index. Also known as the CPI, the consumer price index keeps track of the cost of consumer goods from food costs to home heating costs.

Inflation erodes your purchasing power. It makes your dollars go down in value. Think of a 3% inflation rate as a 3% tax on your money.

Inflation is your enemy. You can't control it, but you can learn to live with it. The key is to have the rate of return on your investments and retirement assets stay ahead of inflation by at least 3%. This means that you'll have to invest in asset classes that have the potential to stay ahead of inflation, like stocks for example.

Investing at a rate of return in excess of inflation means you're increasing your purchasing power. This is what you should be trying to do in your retirement planning.

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