Do you remember how much a gallon of gas was when you first started driving? It probably isn’t anywhere near the price that it is now. In fact, you’ve probably noticed that the cost of all the food, supplies, and extras you buy on a daily, weekly or monthly basis has risen a bit (or maybe even a lot) over the past decade. This kind of continued price increase on general goods and services is called inflation.
Inflation and Your Wallet
When prices rise on the goods and services you routinely buy, your money in essence loses value because now, every dollar buys less than it did before. This can impact your spending and savings and could even result in an increase in your overall debt. For example, consider an individual who’s already surviving paycheck to paycheck. When the prices rise for everything this person buys, they either need to adjust their spending so they buy less, work more to earn extra money, or start using credit cards to make up the difference. Inflation also affects those who aren’t living paycheck to paycheck. They’ll need to free up the extra money for routine expenses by saving less, working more, or cutting their spending.
Inflation and Your Retirement Savings
Inflation doesn’t just hurt your income while you’re working; it also erodes your retirement savings and hurts your investment returns.
- Inflation reduces the power of the gains you make. If your portfolio balance grows 4 percent and there’s no inflation, then you’ve made a nice gain. But if 2 percent inflation offsets that return, it’s essentially cutting your growth in half.Inflation cuts into the principal you have invested. When your dollar can’t go as far as it once did, it means you must withdraw more from your retirement account in order to support yourself. That means you have less capital invested and growing.
- Inflation can impact overall bond returns. As inflation changes the economy, interest rates often rise—which makes existing bonds less competitive.
- Inflation erodes the value of cash savings. Money left in bank accounts is generally referred to as a “safe place” where the value won’t decrease. However, if the interest isn’t growing funds at the same rate as the cost of goods and services are growing, it loses value by way of loss of purchase power.
Example: If you put money under your mattress 30 years ago to purchase a new home, you would have needed about $89,200, which was the average sales price at that time, according to the US Census Bureau. That same amount would only get you a 27% down payment on a home today, when the average sales price of a new home is $331,400.
Now picture that example in terms of retirement income. If you are entering into a 30-year retirement with fixed income, you will need to plan for the fact that it may only be able to purchase approximately 30%-40% of what it used to be able to purchase after thirty years, depending on the rate of inflation.
At Kramer Wealth Managers, we understand the threat that inflation poses to your savings and your way of life after retirement. We can help you adjust your portfolio so that it is equipped to outpace inflation and preserve your principal while helping your post-retirement income last. Contact us today to get started on your WealthPath to financial health and security.