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The falling dollar, inflation and your retirement

It's hard enough to save for retirement in good times, but when the dollar appears to be in an endless swoon, it may mean that you need to save even more before saying goodbye to your job.

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A falling dollar is losing buying power in relation to other currencies. When the dollar falls against the euro, it's more expensive for Americans to pay for lodging, food and souvenirs in countries that use the euro, and it's cheaper for people from those countries to visit America.

But it's not just Americans traveling overseas who need to concern themselves with this. A weak dollar triggers a rise in prices that can boost inflation and reduce purchasing power. If you're counting on $50,000 a year in today's dollars to cover expenses in retirement 20 years from now, you may find that you'll need closer to $75,000.

"The falling dollar by itself is really not a danger," says Jason Flurry, president of Legacy Partners Financial Group in Woodstock, Ga. "Currencies rise and fall all the time with very little effect on the average consumer. But it's one of those things that can bring an economy to its knees if left unchecked."

Falling dollar/US dollar index
The U.S. Dollar Index shows the value of the dollar against a basket of foreign currencies. Those currencies are the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and the Swiss franc. Currently, Vatican City and 13 countries are in the so-called Eurozone: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain.

The index is a geometric weighted average of the six currencies relative to the dollar. Because of the number of countries that use the euro, that currency is given more weight than any of the others.

The index began in March 1973, when currencies of major trading nations began floating freely against each other. The index was assigned a base value at that time of 100.00. When the index is at 85.00, it means the value of the dollar has fallen 15 percent from its base and it's weaker compared with the other currencies than it was back in 1973. If the index is at 120.00, it means the dollar has risen 20 percent since the base period and is stronger in comparison with the other currencies.

US dollar index

Frank Trotter, executive vice president at EverBank in Jacksonville, Fla., says he expects the dollar to decline for at least another three to five years.

 
 
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