The one word that all pre-retirees should prepare and consider is Inflation.
Ronald Reagan said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Inflation is a scary term that conjures up images of German children stacking useless money in the 1920s (hyperinflation), or national governments going broke like Venezuela and Argentina. Inflation is something that every retiree and pre-retiree should know about and consider. We hear about the Fed and inflation all of the time, but we haven’t experienced high inflation in quite some time.
Simply, inflation is the rate at which prices for goods and services go up, as the value of currency goes down. Inflation can also be sparked by loss of faith in one’s government and the money that it issues, which generally leads to hyperinflation. The average historic inflation rate (from 1913 to 2013) in the U.S. has been 3.22%. At such a rate, a candy bar that costs $1 today will cost $1.03 in a year. After 10 years $1.48; 20 years $2.19; 30 years $3.24. The impact of inflation on your retirement savings creeps up on you and your lifestyle and can hit hard. Retired clients often tell me that they paid more for their last car and they did for their first house—that is inflation in action.
Here’s another way to look at inflation. If you retire at age 65 with $100,000 in annual retirement income and inflation is at 3.22%, then the value of the $100,000 would shrink to less than $50,000 in 20 years. In essence, you’ll be living on half of your expected income by the age of 85. This is a sobering thought.
This is why sticking your money in a savings account is not enough and why proper investing is so crucial. Historically, invested money has outpaced inflation. Proper investing includes using asset classes and investments that have historically performed well against inflation. Diversifying your portfolio can help hedge against inflation, which can make all the difference.
It is also good to know about stagflation and deflation as our economy has and will face these cycles as well.
- Stagflation is something we have heard a lot about lately. It is a condition of slow economic growth with high unemployment. So, the economy is stagnant, but there are also rising prices. So, there is less money for you to spend.
- Deflation is the opposite of inflation-- the rate at which prices for goods and services go down, while the value of currency goes up.
- Double Digit Inflation—from 1917 through 1920 s inflation was rampant and we had several years of double-digit inflation. This also happened in the 1940s.
Inflation can be tough on your income and on your savings. Plan ahead and consider how inflation can impact your retirement. You’ve worked hard for your money; it should work hard for you.
If you have questions on how to guard against inflation or would like to discuss your options, please give us a call at 732-224-9900.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.