Don’t Let Inflation “Deflate” Your Retirement Dreams


Since the Great Recession ended, the country’s annual rate of inflation has held well below its historic average.

Rates of inflation are calculated using the Consumer Price Index, published monthly by the Bureau of Labor Statistics.

[Related: Should You Ever Borrow From Your 401(k)?]

Last year, the CPI ticked up just 0.12%. The average CPI over the 100 years since 1916 is 3.2%.

A rate around 3% seems benign–unless you’re a retiree with a portfolio that leans heavily toward cash and fixed-income investments.

A portfolio of staid bonds, cautious stocks, and safe mutual funds will insulate you from market gyrations. But, it will not protect you from the erosive effects of inflation.

You can’t ignore what inflation will do to a portfolio made up overwhelmingly of conservative investments. You can expect steady income, but you can also expect that the purchasing power of that income will be reduced.

Think of it this way: If you need $40,000 a year today to keep the wolves from the door, you’ll need $60,000, maybe $70,000, in 10 years.

Don’t underestimate the amount you need due to inflation. You can calculate how much inflation will impact your retirement needs using a retirement calculator. There are many.

If you Google the phrase “retirement calculator,” you’ll be deluged.

Most financial services companies have an online calculator to estimate how much to save for retirement.

They will ask you to input: current age; life expectancy; desired retirement age; income to replace at retirement; current gross annual income; expected rate of inflation.

Take “the estimate” to your financial adviser. You need eyes more expert and critical than your own to look at the number.

“You always have to worry about inflation,” says John Waggoner, an investment news columnist. “Even at the historical average of 3% since 1926, you’re going to lose one-third of buying power over 20 years.

“And there’s always the threat that inflation can spiral up as it did in the early ’80s, when it hit 13%.”

You can’t grow your portfolio on conservative investments. It’s that simple. Although money market funds and certificates of deposit are ironclad safe, they are not impervious to the ravages of inflation.

Spice up your portfolio with a few growth stocks. You don’t want to outlive your money.

Mark Bass, a Lubbock, Texas, financial planner, protects his clients from inflation. “I don’t want their bank account to go to zero before their blood pressure.”

Inflation is your constant enemy. Always keep its effect in sight.


×