What is the potential risk of ignoring inflation in financial planning?

Ignoring inflation in financial planning can lead to underestimating future savings needs. Inflation decreases the purchasing power of money over time, meaning that the amount of money required to maintain a certain standard of living will generally increase. If a financial plan does not account for the potential rise in costs of goods and services due to inflation, an individual may save an inadequate amount. Consequently, when they reach retirement or need to access these funds in the future, their saved amount may not be sufficient to cover their expenses, leading to financial shortfalls.

Incorporating inflation into financial projections allows individuals to set realistic savings goals that align with their future financial needs. By considering the impact of inflation, one can make more informed decisions about how much to save and where to invest, ensuring that their financial plan remains robust against rising costs.