Savings being eroded by inflation?
To prevent this from happening, your investment has to earn more than inflation. From 1961 to 2009, inflation has averaged about 2.74% per year.
Assume the inflation is at 3%, one person will need more than $2 at the age of 75 to pay for something which cost $1 at age 50. However, you will come out ahead if your investment is higher than the inflation rate. This means that if you assume your returns to be 8%, $1 dollar investment at the age of 50 will be worth $6.85 at age 75, which outpaces the effect of inflation.
Lost opportunities?
Let’s look things in a different point of view now. If you fail to take advantage of compounding, what is your opportunity lost? If you are 50 years old, for every dollar you spend now will deprive you of almost $7 at age 75 (at 8%). Which means one extra pair of shoe which you spend $90 on today will cost you more than $600 ($90 × $6.85) of retirement money. For a 30 year old, the opportunity cost will be much higher if he purchases the same shoe, it will cost him almost $2,900 ($90 × $31.93) at age 75 and about $6,200 ($90 × $69.93) at age 85.
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