Hindsight may be 20/20, but foresight will help you more in retirement.
Over time, most things get a lot more expensive, particularly food, health care, utilities, and housing.
The time value of money (TVM) principle states that a sum of money today is worth more than the same sum in the future. In other words, the sooner you use it, the more valuable it is.
For example, if you had a choice between receiving $1,000 today or $1,000 one year from now, what would you choose? Choosing the former will provide more value to you now than a year from now.
There are three reasons for why this is true, according to Harvard Business School:
- Opportunity cost: Money you have today can be invested and accrue interest, increasing its value. This is where compound interest comes in. The sooner you save, the more you can benefit from the accumulated interest.
- Inflation: Your money may buy less in the future than it does today. When you are making decisions about when to retire, it’s important to add this to your calculations. According to Investopedia, inflation can vary sharply—for example, in 2021, inflation hit 7% in the wake of COVID, but was 2.9% in 2024. The historical average is around 3%, but you’ll want to decide on what seems reasonable to your situation.
- Uncertainty: Something could happen to the money before you’re scheduled to receive it. Until you have it, it’s not a given.
Understanding the TVM is critical in ensuring your retirement plan stays ahead of inflation. Keeping this principle in mind can help you plan how much to save, when to withdraw, and to evaluate investments to ensure your future income covers living expenses despite rising costs.