3. Adjust the Income Figure for Future Inflation
As a starting point in Step 1, you used the amount of money you would need to live if you were using today’s dollars. But in the future, today’s dollars won’t buy you what they do today. You have to account for inflation.
Inflation is the erosion of the purchasing power of money. Whatever you can buy today for $7,500 a month, you will get a little less of next year and a little less of the year after that, and so on, based on historical patterns of inflation. In other words, you will need more money in the future to buy the same things you’re buying today.
For the lifestyle that costs you $7,500 a month this year, next year—assuming a 3% rate of inflation—you’ll need 3% more to have the same buying ...