The Fed raised interest rates for the first time in nine years on Wednesday. Unfortunately for many retirement savers, along with rising rates comes another factor that has been absent from the economic landscape for years: inflation.
The 0.25 percent increase in the Fed funds rate was widely anticipated, and a statement from the Federal Open Market Committee made clear we should also look for "gradual" rate hikes in the future as economic conditions warrant.
According to the Fed, those conditions include an improving labor market and a return to 2 percent inflation. Inflation had been stuck below 1 percent for years, well below the Fed's 2 percent target. But that has changed.
In November, core inflation was up 2 percent on the year, the largest 12-month increase since May 2014, driven by rising housing prices.
You haven't seen it in a while, but be prepared. Inflation over time could have a significant impact on the money that you've put away for your golden years. Don't underestimate the power of inflation to eat away your retirement savings, some financial advisors caution.
Say you plan to live on $50,000 a year when you retire in 2035 — and plan to live at least 20 more years beyond that. With zero percent inflation, you'd need to have saved $654,266 by the time you retire — that translates to $245,586 invested today, assuming a 5 percent annual return.
With inflation rising to 2 percent, you'll need to have saved nearly double that amount — $1,144,081 (or $431,192 invested today) — by the time you retire in 20 years to be able to count on $50,000 a year in income for two decades in retirement. So, as inflation rises, you'll need to save even more. Check out the impact of inflation on your retirement with Bankrate's online retirement calculator.
Some financial advisors suggest you can mitigate the effect of inflation on your retirement savings by doing this: