What inflation rate did Mary assume when calculating her retirement income needs of $60,000?

In this scenario, Mary assumed an inflation rate of 3% when calculating her retirement income needs of $60,000. This assumption is critical because it reflects how she anticipates the cost of living will increase over time, impacting her purchasing power in retirement.

Inflation erodes the value of money, meaning that over the years, the same amount of money will buy fewer goods and services. By applying a 3% inflation rate, Mary is likely considering historical averages as well as projections for future inflation, which often hover around this figure in economic forecasts. This allows her to ensure that her retirement income remains sufficient to meet her needs over the course of her retirement years.

In contrast, lower inflation rates, such as 1% or 2%, would suggest that Mary is planning for a less aggressive increase in living costs; however, this would potentially understate her future income needs. A higher rate, like 4%, could lead to overestimating her needs, resulting in saving too much or having unnecessarily large withdrawals from her retirement accounts. Therefore, a 3% inflation rate serves as a balanced and realistic approach for assessing future retirement income requirements.