Transferring Your Farm Business to the Next Generation

Bulletin 862

Effects of Inflation on Retirement Income

The life expectancy graphs in the preceding section illustrate that even "senior citizens" frequently live 30 or more years, especially when considering their joint life expectancies. Thus, the effects of inflation on asset values and living costs can be dramatic.

We can use Table 12 to estimate future asset values and income needs for inflation rates from 3 to 12 percent per year. Simply locate the intersection of the estimated future inflation rate across the top of the table and the number of years in the left column to determine how inflation will affect asset values, income and living costs. For example, if the expected inflation rate is 5 percent, Table 12 tells us that it will take $1.63 in ten years to buy what $1.00 will buy today.

The "rule of 72" is a rule of thumb that can help estimate how fast asset values and living expenses will double at compound interest. The rule of 72 is as follows: "Divide the interest (inflation) rate into 72 to estimate the number of years it will take for asset values or living expenses to double." For example, if the inflation rate is 4 percent, living costs will double every 18 years (72 divided by 4). We can use the "rule of 115" in the same way to estimate how long it will take for net worth or living costs to triple.

An adequate income for the parents should take priority over transfer of the business to the next generation. NCR Publication No. 264, Financial Planning for Retirement, provides many useful guidelines for estimating retirement living expenses and projecting retirement income. This bulletin lays out the following step-by-step procedure:

1. Project what your desired life style will cost in today's dollars.

2. Adjust these costs to the beginning of retirement and beyond.

3. Monitor, refine and adjust these projections regularly.

4. Project income from social security, pensions and benefits, savings and investments, earnings and assets that could be sold.

Completing the worksheets in Publication No. 264 will help you decide whether the transfer of assets to the next generation should begin before retirement, during retirement or at death. One of the worksheets from Publication No. 264 is included below to illustrate the procedure. The Joneses have projected that their living costs in the first year of retirement will be $34,884. If the inflation rate is expected to be 5 percent per annum, their living costs 10 years into retirement will be 1.63 times higher, or $56,860 for the same lifestyle. One could use different inflation rates for different items. Past experience has shown, for example, that the rate of increase in medical expenses has been much higher than in food.