How Inflation Affects Your Financial Future

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By Tom Sightings

People retiring today can expect to live another 20 years, according to Social Security figures. But in making our financial plans, we have to account for 30 more years, since roughly 1-in-5 of us will live past age 90.

Once you're retired, you live on a fixed income. There are no more raises, bonuses or employer contributions to your retirement plan. Even if you can afford your lifestyle today, you have to worry about what's going to happen over the next 30 years as prices inevitably climb, some years more than others. Will Social Security keep up? Will your investments produce enough income?

Think of what happened over the last 30 years. In 1983 the average college tuition was less than $4,000 a year. Today it's over $23,000 a year. The cost of college is up 600 percent. At that rate, in 30 years average tuition will be well over $100,000 a year, while top private colleges will charge two or three times that much.

If your kids are grown up, you no longer have to worry about college tuition. But you do have to worry about medical costs. According to Bloomberg, medical expenses have also increased 600 percent in the last 30 years. And hospitals have given us an even bigger dose of inflation. Back then a typical five-day stay in a hospital cost around $600. Now it averages $20,000. At that rate, by the time we're 90 the cost of a hospital stay will top half a million dollars.

My wife and I are thinking about relocating in retirement, so we've been looking at real estate prices. The house we now live in is worth, according to Zillow, roughly $550,000, which is about average for a suburban home in the Northeast. %VIRTUAL-article-sponsoredlinks%But when the place was built, some 30 years ago, it sold for less than $70,000. That's an eight-fold increase, even accounting for the recent slump in real estate. If you want to buy this house in 30 years it might cost over $4 million.

I don't want to scare you too much. According to CNN, for the last 30 years college tuition, medical fees and housing costs have all gone up faster than the general rate of inflation. The consumer price index –- the price for an average basket of goods and services -– sits at a more modest 235 percent level compared to 1983. Whatever cost $100 back then now costs $235.

Some items have gone up less than inflation. I recall buying a Toyota Camry in 1984. It set me back about $12,000. Today that car costs around $22,000, or less than twice what it did 30 years ago -– and it's a better car. The price of most foods, from milk and eggs to coffee and alcohol, have also gone up less than inflation.

In 30 years, if I'm alive at all, the only people interested in the value of my house will be my heirs. But I might still want to drive my old Toyota, and I'll want to eat or mail some Christmas cards or help my grandchildren pay for college. If prices continue for the next 30 years the way they have in the past, then a gallon of milk or a box of cornflakes will still be under $10, but a gallon of gas will gear up to $12 and a book of stamps will stick you for $21. If your genius grandchild wants to go to Stanford, the price will be well over $1 million.

Meanwhile, next year's increase in Social Security is all of 1.5 percent. That follows a 1.7 percent increase for 2013, a 3.6 percent increase in 2012 and no increase in either 2010 or 2011. It's not much, but it's something.

Your investments will probably go up more. In November 1983 the Dow Jones Industrial Average sat around 1,250. Now it's bumped up to 16,000 -– a more than 12-fold increase. According to Fidelity Investments, for workers "age 55 or older who have been active for at least 10 years, the average 401(k) balance is now $269,500." All other things being equal, that balance will top $3 million in 30 years.

Of course, there's no guarantee that the next 30 years will bring inflation or stock market gains like the last 30 years. But forewarned is forearmed: You must take inflation into account as you plan for your future. Meanwhile, look at the bright side –- at least we'll be able to afford to eat a decent breakfast.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.

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How Inflation Affects Your Financial Future
Where you live can have a huge impact on your tax bill in ways that may surprise you. Some states are more tax-friendly for retirees than others -- particularly if you are living on a fixed income -- can have a big impact on how much you have left over to spend.

Click through our gallery to see which states qualify as "heaven" and which are "hell" for income tax, pension, social security benefits, sales tax and property tax.

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Don't assume that a state with no income tax qualifies as a tax haven. High sales and property taxes can more than offset the absence of an income tax.

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Only three states exempt virtually all retirement income (including public and private pension benefits, 401(k) and other retirement-plan distributions, and IRA withdrawals) from state income taxes.

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Five states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, but most of them also have fairly high top tax brackets.

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36 states and the District of Columbia don't tax Social Security.

36 States That Are Heaven
Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming
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The remaining 14 states tax Social Security benefits to some extent.

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