The great inflation chase

Except for that painful spike in gasoline prices, chances are you haven't given much thought to inflation lately. Those white-hot increases in the cost of living throughout the 70s, 80s and early 90s are largely a memory. With overall inflation rates coasting at around 2.5 percent to 3 percent for the last few years, there are other, more important economic considerations in your life as a busy physician. However, whether your retirement is a long way off — or just around the corner — inflation is destined to exert a major influence on your future economic well-being. Ignore it at your peril.

Jim Slavin, M.D., a retired plastic surgeon, agrees. "You never know what's coming down the road," he says. "I started planning for my retirement years ahead of time. Now I'm happy that I did."

INFLATION EFFECTS COMPLEX If you've been around long enough to remember McDonald's 15-cent hamburger, you may feel nostalgic when you shell out 89 cents for that same treat today. But which is the better deal? Surprisingly, that same hamburger would sell today for about $1.05 if it kept pace with inflation, making it cheaper today than it was 50 years ago. However, a McDonald's hamburger is a rare exception. Most products and services we buy keep pace with or exceed the average inflation rate. The only meaningful way to compare prices from one period to another is to compare them with the general price level of each period or to the percent of average wages necessary to pay for the item during each period.

Any surgeon paying for malpractice insurance today is well aware that costs have risen at a pace far in excess of the average inflation rate. College tuition is another of today's costs that is mind numbingly more expensive than in days of yore.

So what does all this have to do with your retirement? Plenty. The rate of inflation can vary wildly from one year to the next. However, regardless of the variations, inflation continues its work relentlessly year after year. Even that harmless-seeming inflation rate of recent years takes a significant toll over time. After 10 years of 2 percent inflation, that dollar bill in your pocket now will be worth only 82 cents in today's dollars.

HOW INFLATION WILL AFFECT YOUR RETIREMENT Here's an example of how inflation affects your life right now: If you paid $60 for a week's groceries in 1985, you're paying about $109.67 for those same items today. In another example, if you paid $18,000 for a new car in 1985, it will cost you approximately $31,944 to replace it with a similar 2007 model. Ten years from now, a comparable new car will cost you about $40,891 (assuming a modest 2.5-percent inflation rate, which seems optimistic in view of the latest inflation reports).