Inflation . . . The Silent Killer
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One of the most crucial mistakes people make upon retiring is not considering the effects of inflation on their retirement nest egg. Most of us will be faced with a serious challenge during this 21st Century—how to avoid outliving our money. Or put another way, how to maintain a sufficient income while unemployed for the next 25 years or more.
With a modest $50,000 retirement income today, at a 3% inflation rate we’d need more than $90,000 a year to maintain the same lifestyle just 20 years from now. Or to view it another way, at 3% inflation the purchasing power of your $50,000 retirement income today would shrink to less than $28,000 in 20 years.
Don’t believe it? Just look back a couple of decades. In 1971, it cost eight cents to mail a letter versus 63 cents at the time of this writing. That’s nearly eight times as much due to inflation. And based on history, do we have any reason to think that this pattern will not continue?
Inflation is a silent killer. Put a frog in a pan of hot water and the shock causes it to jump out right now. But put that frog in a pan of cool water that slowly and unnoticeably heats up to boiling temperature and you’ll have cooked frog legs. Inflation can cook us the same way. Year after year, it slowly and subtly eats away our purchasing power.
But despite these warnings, too many investors are complacent about inflation’s effects on their assets because it doesn’t hurt them enough short-term. But over the long-term, they slowly experience an erosion of their purchasing power and then have to make painful lifestyle adjustments.
On a day to day basis, many retirees give little attention to the small lifestyle adjustments inflation forces them to make until one day, they’re sitting there, looking at their worn-out carpeting, 20-year old TV and wine in their racks downgraded over the years from Kendall Jackson to Carlo Rossi.
So investing for retirement shouldn’t stop the day you retire, but continue on with a firm commitment to keep your portfolio growth and income on pace with inflation and taxes.
