I set my goal back in 2010 that I would need $2 million to become a financially independent person. This means that I have enough capital to generate income which should cover my expenses.
I looked at the role of the inflation on my portfolio. Since the 2010 Cumulative inflation over 3 years is 9%. In practical terms it converts $100 in 2010 worth less than $92 today. If current inflation rate will stay the same by 2040 the same $100 would worth only $48.
I reported that my portfolio worth $226,800 but in 2010 money it is $209,000. This underlines importance why rate of return on your investments should be at least 2-3% above inflation rate.
Lets run a scenario with following assumptions :
- Inflation rate 4% a year.
- Annual Investment Savings rate start at $42,000 and go up by 5% a year or 1% above inflation.
- Rate of Return (ROI) on investments 2% above inflation.
In 2040 this would present:
- Annual Investment Savings of $135,454 or $65,000 inflation adjusted (after 27 years at 1%).- Net Worth $5,517,000 or $2,646,000 inflation adjusted.
I need to pay attention to both - rate of return and inflation. Only this two figures together can tell the story. For example, a company continuously increase dividends pay outs year after year. It should be no surprise. What we need to look at - inflation adjusted results. Historically inflation was in two digits for years, so no wonder principals are growing relatively fast.