I teach financial literacy and I’ll tell you what frightens me.

Today, I had a 30 year old tell me that he was comfortable with his retirement plan because he and his wife were on track to have $1.5 million in his investment account and 401(k) when they retire in 35 years. They would be out of debt, with a paid off house and with the kids out of the house their expenses would be dramatically lower than they are today. All that considered and add in Social Security and he thought they would be fine.

Knowing that this particular fellow is not what I would call ‘purposefully frugal’, my response to him was that if he retired tomorrow and he had that $1.5 million today, he would probably run out of money by the time he died even if he only lived to 85. Which, of course, is statistically likely for someone who is 65 today, so chances are pretty good that by the time this young man reaches 65, thirty-five years from now, his life expectancy will be even higher.

Naturally he asked me why I said that. My reply was this:

IF, Social Security is still around in 35 years – and that’s a huge question mark right now – it will be dramatically different. However, we’ll assume it will contribute something to their income. And we’ll come back to that. My bigger concern is that he and his wife are basically ignoring what inflation does to the cost of living.

The stock market is like an ecosystem.

It’s like a forest that is constantly growing and dying. And when one part dies another one pops up. Statistically, the stock market grows at an average of about 9% each year but taxes will eat some of that. Inflation, on the other hand, while it’s still a whopping 8+% this year and the stock market is trying to recover, it averages only about 3% a year over time. Last September’s weather situation of hurricane Ian ravaging Florida and the South Carolina coast lends itself to an appropriate analogy.

Think about what happens to coastal properties when they’re hit by a hurricane. All the dead trees die and are replaced with new growth that is bigger and stronger and more resistant to the next hurricane. The stock market is very similar in that when a bear market hits some industries die and are replaced with entirely new industries. And you can define THAT growth as a measure of true inflation. Not what the government says using the CPI. The price of a stock may go backward temporarily during a bear market – like last year – but eventually the market recovers and prices go back up and pass where they were before the bear market started.

Over time everything is more expensive and some things you’ll be paying for 35 years from now, don’t even exist yet, so if your investments aren’t growing more than what the market is doing then, in effect, you’re falling behind. If someone had told me when I was 30 that before I retire I’d be buying a new phone every couple years for $1000 a pop, I would have told them to stop smoking crack.

Things change.

Think of it another way. If your annual raise or promotion is 5% and inflation is 8% then you just lost 3% of your income. If you’re in business you’re either growing or dying. There is no such thing as maintenance because growth in your market and inflation we’ll eventually eat up every penny of your profits if your growth doesn’t keep pace with the environment around you.

But while inflation isn’t ALWAYS this high, it will still eat up a lot of what your cost of living will be during both your accumulation phase and your retirement and there is no stopping its impact on your wallet.

Consider this. If your investments grow at 9% per year and all-in, Federal, State, Local, property, etc. taxes cost you 3% then your actual growth is only 6%, right? Add in an average of 3% inflation, and that 6% quickly becomes worth – in terms of goods and services you pay for – only 3%. Still, 3% a year added to $1.5 million is $45,000 a year, just about what this fellow makes per year, so naturally he’s thinking “all good”.

Here’s a problem. Even though their home will be paid off, it’s still not an asset. The appreciation on the property can’t be accessed unless they sell it or get another mortgage. And the upkeep and property taxes are a drain on their income so it’s actually a liability. That’s something few people consider.

Here’s another one. Food.

Two people, eating just twice a day, spending just $5 a meal per person TODAY costs $7,300 annually. In 35 years, at just a 3% rate of inflation, the same meal that cost $5 today will cost $13.66. Almost 3 times as much. Add the annual inflation rate to that cost and, assuming they eat every day, and retire 35 years from now, then over just 20 years in retirement, that cost becomes almost $600,000. Make that $10 a meal today and then it becomes $1.14 million over that same period. Throw in a few years like we’ve had recently and that cost will double again by that time.

Will Social Security cover that cost? Maybe. Maybe not. Do you want to bet your life on it?

And then of course, add this. According to a recent report from RBC Wealth Management, the projected lifetime cost of care for someone who is a healthy 65-year-old in 2022, is $404,253 – and that doesn’t factor in long-term care costs, which could be as high as $100,000 a year.

When RBC asked people how much they think they’ll spend on health care at age 65, on average, they said about $2,700 a year. In reality, experts estimate at age 65, today, the annual spend on health care for a healthy couple is close to $5,700 per person ($11,400 for a married couple). That will be likely three or more times that cost by the time our guy and his wife retire in 2057.

And those are out of pocket costs. Medicare, if that still exists, will only cover a certain number of expenses, which means people have to fill that gap. Those costs start to add up quickly as we age.

The bottom line is to plan for about three times more than you think you’ll need today, because rising costs even without rising taxes and bear markets factored in will eat a major chunk of your savings down the road.

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