What's a dollar worth? As you will see, it is worth less and less as time goes on. Inflation will affect everyone who purchases goods and services. As the following figure shows, inflation can have a dramatic effect on the buying power of your money. Even relatively low rates of inflation can erode your purchasing power over time.

The figure shows that $1.00 in 1945 would be worth only nine cents in 2005. Said another way, an item that costs $1.00 in 1945 would cost $10.71 in 2005. If future inflation mimics the average inflation of the last 60 years, $1.00 today will be worth 67 cents in 10 years, 45 cents in 20 years, and just 31 cents in 30 years.

Inflation for some goods and services most frequently used by retirees, such as over-the-counter and prescription drugs and health care, increases at a much higher rate. The government has created a consumer price index, the CPI-E, that better reflects the spending habits of elderly people, and has found that the rate of price increase for this index has been greater than the regular price index every year since its inception in 1984.

People living on a fixed income that is not adjusted for inflation are especially at risk. Social Security is adjusted, but most private pension plans are not.