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Keeping up with Inflation

Discussion in 'General Investing Discussion' started by legionx, 11th Sep, 2008.

  1. legionx

    legionx Member

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    This is probably a really simple question. But say if I invest $100 for 30 years at 10% return, I get around $217,132.11 with compounding interest.

    Now if we assume 4% inflation for the next 30 years it should only be worth around $66,945.88, which means I need $704,245.74 to keep up with its real value. (Source: Inflation Calculator - Save Enough to Account for Inflation)

    If I increase my monthly contributions by 4% each year will I keep up with inflation's decrease of 4%?
     
  2. Billv

    Billv Getting there

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    Excuse me, you've lost me there
    Where did the $704,245.74 come from?

    Cheers
     
  3. legionx

    legionx Member

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  4. Billv

    Billv Getting there

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    Something is not right with your calculations.
    Investing $100 for $30 years and compounding daily at 10% will come to $2007 and not to $217K.

    Even if an additional $100 was added monthly so yout total yearly investment was $1200 the total amount after 30 years only gets to $24K

    But let's assume that it did get to $217K.
    To be able to counteract inflation you need to be adding 4% of the capital and not 4% of your contribution and you need to be doing this at the compounding rate.
     
  5. legionx

    legionx Member

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    Thanks, that answers it, 4% to the capital, that makes sense. I'm not sure why your calculations are different. I used a different calculator this time and actually got more!

    Savings Results Calculator

    Pump in $100 per month, for 30 years at 10% p/a compounding interest. You get $226,048.79
     
  6. Billv

    Billv Getting there

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    nice 1.

    Now if you went 1 step further and sallary sacrificed $115/month into your super you will pay $15% contributions tax so your monthly contribution will be reduced to $100 but your actual cost depending on your tax bracket could be up a lot lower than $100.

    If you were on the 40% income tax scale you could increase your super contribution to $170/month. You will pay the 15% contributions tax but you will still have $144.50 added to your super.

    So your savings are higher than if you did it outside super and it will still cost you $100/month.

    The only problem with the above plan is that you can't touch the money until you are at retirement age.

    Cheers
     
  7. crc_error

    crc_error The Rule of 72

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    even better BV, if your a low income earner, you can put in your $100 doll payment, the government will give you another $150, so your contribution would be $250 per month...

    how about we run those figures through the system!
     
  8. Billv

    Billv Getting there

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    CRC

    I did and it came up with crc_error something....:D
     
  9. Tropo

    Tropo Well-Known Member

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    Bill,

    You just made my day !!!:D::p:D
     
  10. Billv

    Billv Getting there

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    That CRC was trying to crash the system :)
     
  11. Tropo

    Tropo Well-Known Member

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    Watch out Bill! It might be a virus...:p;)