But observe that the other two, personal investments and retirement plans, have an aspect that we can influence. The ultimate success or lack thereof for these two can be greatly influenced by investment performance. This section will highlight some important concepts that apply to investments, and thereby increase our possibility at succeeding in achieving our retirement planning goals. There are some very basic ideas or concepts that if understood can improve the chances of our success. Inflation can be defined as the increase in the prices of goods and services over time that we as consumers experience in our economy.
Inflation is a problem for an investor or for an investment portfolio.
The problem is that because of inflation it takes more dollars in future years to buy the same level of goods and services that we can buy today. In other words, each year that you live in retirement requires more money than the previous year, just to maintain the same standard of living. So an investor has to be aware that the purchasing power of his or her dollar is eroding over time due to inflation. If he or she wants to maintain the same standard of living, it will be necessary to have additional dollars to offset the effect of inflation, or to invest at least some part of your portfolio in assets that have the ability to increase in value, pay increased levels of income, or both. One way of looking at assets and their return is to compare assets on the basis of the real rate of return.