2 . Consider Inflation
It’s inevitable: the more time passes, the more expensive things get. So, when planning for the future, make sure not to overlook inflation and it impacts on the value of your money in the future. For example: to have what feels like $1 million today in 30 years, you need to have saved nearly $2.5 million! While that sounds downright depressing–trust me, I sympathize–the bigger point here is to make sure you don’t forget that pesky 3% annual cost of living increase (on average) when you’re calculating your retirement needs.
While you’re at it, consider how much you’ll really need to live the kind of retirement you want to live. Will your future lifestyle require millions? Or could you get by with less?
Want to hedge against inflation? Owning a home can help. The S&P/Case-Shiller index of property values increased 10.9 percent from March 2012 to March 2013, the biggest 12-month gain since April 2006. You can also consider Treasury Inflation-Protected Securities (TIPS). They provide for inflation-adjusted increases in both principal value and interest payments, are considered to be less volatile and more protective against credit and interest rate risk than conventional bonds. TIPS can be a smart core holding in your portfolio, but should still be combined with equities for better long-term growth. Also keep in mind that TIPS, like bonds, can lose value. You can buy them either directly from the government or through mutual funds or ETFs (which are more tax-friendly). And remember that the average returns on stocks are still better than inflation too. The S&P 500 index has returned an average of 10 percent over its history.
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