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The Truth About "Safe" Investments During Inflation

Various news outlets have mentioned their predictions for inflation in the coming years based on recent market trends. You know I try not to make predictions. Instead, I want to give you an example that I hope you remember.


Let’s suppose you have $100,000 at the first of the year. Inflation is 2% over the course of the year.  your purchasing power is reduced to $98,000. Now, if you earned 2% on your investment, and a lot of people do, that means all you’ve done is offset the inflation. Now, let’s suppose, you take out 5% to live. Right away you’ve spent $5,000 so you’re down to $93,000 in purchasing power adjusted for inflation. Next year, thanks to inflation, your dollars are worth less, so you will need to withdraw 5.2%. That gets you down to about $86,000 in just two years. Take a look at the graph below but before you do, remember the current rate of inflation may be as high as 5%-6%.

You aren’t broke, but you are on your way to rock bottom. It’s not something you notice right away. You might make subtle adjustments to your lifestyle. Maybe you’ll stop going out to dinner or entertaining as often as before.

These changes mask the fact—for a while—that your safe investments are anything but.

What's your vision?

The questions above are similar to what I would ask you if we were sitting down, whatever your age, and deciding if we should work together. What sort of future do you envision for yourself? What resources do you have right now to accomplish that? Most people have a vision and it’s easier to talk about visions than absolutes. When I work with clients, I try to take visions and resources and connect them. To achieve your vision, you have to either reduce the vision or increase the resources. If you say, “I want my life to be the way it is now,” you can take what you have and what you earn and come to a point of realism.

So, ask yourself, “How do I see my retirement?” If your answer is, “I see myself in Florida in the winter, coming back home to visit the family,” that life is probably going to take as much money as you’re spending in your working years. I’ve never had someone say, “I’m going to downsize. I’m going to get rid of my Mercedes and buy a Ford.” Most visualize a life in retirement like the one they’re living. Even if you’re nearing retirement age right now, ask yourself what it will take to support that over a thirty-year period. Twenty-five  years is a long time to live without a paycheck. When a couple are both living at age 65, we expect one of them to survive to age 90.

Ultimately, I look for only one quality in a client. It is believing that steadily and with discipline, you can achieve your financial goals.

Financial Security

To achieve real financial security we must address our hopes and beliefs with reality.  Reality is investors must achieve 2%-3% to breakeven adjusted for inflation. Anything less means you have lost money in the sense of lost purchasing power. Do not forget disinflation has been with us for more than 40 years.  Allowing for regression to the mean it is likely we will see much higher rates of inflation over the next 20 to 40 years.

Unless you are invested to achieve higher rates of return, the inflation reality is your assets will be depleted in a way similar to the graph above.

Investment truth means we must earn at least the rate of inflation to break even. In today’s world that means 3-4%.  To the extent we consume or spend, only those earnings that exceed the inflation rate may be spent efficiently. 

Look at the chart again and ask yourself if too much of your savings is really losing purchasing power. I will answer the question for you. The answer is most of it.

This is an excerpt from the book I'm writing that will be published by Forbes within the next few months.