Do me a favor. Open your wallet and pull out any denomination of American greenback. It can be a Washington, Lincoln or a Jackson. Give it a stare for at least 10 seconds and then describe what you are holding in your hand with only one word.
I'll bet you said the word "money." That's what most people say and they’re not wrong, but there’s more to the story.
What Is Money?
What you are holding in your hand is a form of currency that gives you purchasing power. And isn't it beautiful! What a wonderful and effective medium of exchange for goods and services. Can you imagine life without it? Hey, Bob, how many dozen eggs do you want for that Toyota Corolla? Money is efficient for all kinds of transactional purposes but when it comes to holding its value...it's pretty terrible.
Your currency loses a fraction of its value every single day and over time the loss of that value compounds. Every four weeks the government publishes a statistic called the Consumer Price Index. This index tells us the variation of prices paid by typical consumers for retail goods and various other items. It typically tells us how much more we are paying for everyday living items like groceries, gas, etc. The Consumer Price Index also tells us the exact percentage of value that our currency lost over the last 4 weeks. On average our "money" loses between 2-3% in value each year.
Money Is Purchasing Power
If we know that on average our money is losing a value of between 2-3% yearly, then we know that in 20 years from now our money will have lost about half of its value. Or simply put, in 20 years our cost of living will double. That means if you make $50,000 per year now, you’ll need to be making around $100,000 in 2041 to maintain the same standard of living you have today. So what is your plan in retirement to double your income in 20 years?
Think about the cost of your first car, your first home, the cost of gas, the cost of groceries or the price of a stamp 30 years ago. Prices continue going up year after year. To that point, the only rational definition of money is...purchasing power. If you don't have a plan to increase your money during retirement, you have unfortunately made a plan to run out of money.
You Need A Plan