Thursday, February 9, 2012

Rethink your Retirement Savings! Consider Money Illusion factor! ---> $4 million savings for 2042 is only $2.2 million (@ 2% inflation) or $1.2 million (@4% inflation) today...

From the link:

The author hopes to have $4 million saved by the time he retires in 30 years. That sounds like a lot of money, but how much would that be in today's dollars? Psychologists and behavioral economists are familiar with our tendency to overestimate the value of future dollars. They even have a name for this phenomenon – money illusion. if inflation were a relatively modest 2% a year, $4 million in 30 years would have the purchasing power of about $2.2 million today. And if inflation heats up to a 4% annual pace, $4 million in 30 years would be the equivalent to about $1.2 million today.

Most people are not used to thinking of money in real, or inflation-adjusted, terms. People have to overcome “money-illusion” and save for retirement in Future Value terms, not Present Value perceptions.

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