When you start your personal retirement planning or investing, you may have some important assumptions about your financial plan. You might think it’s the rate of return on your investment. Or maybe it’s the withdrawal rate you can get during retirement. Another important assumption might be the savings rate you receive during pre-retirement.
Although all are important in your investing or personal retirement planning, Blair duQuesnay at The Belle Curve reveals, “There is something else that eclipses each one… the rate of inflation.”
What Is Inflation?
According to Investopedia, inflation is the decline of purchasing power of a currency over time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”
Think about it. You’ve seen inflation. The cost of things goes up over time. Remember how much a gallon of gas cost when you started driving? How about the price of a candy bar or a can of soda from a vending machine when you were a kid?
duQuesnay says, “These are the little things. The costs of housing and transportation, two of the largest expenses in a household budget, have also risen. And some costs, such as medical expenses and college tuition, are rising even faster.”
Why Is Inflation Important To You?
“Inflation lowers the buying power of your money. You may live comfortably on $75,000 now, but even in 10 years, (18 years is the average time in retirement), with the current low interest rates, you would need $89,475 to purchase the same things, based on inflation from 2010 to 2020, a cumulative 19.3% rate,” writes Judy Loy in State College.
“Healthcare tends to be a large expense in retirement, and this runs at double the general inflation rate,” she continues.
And as duQuesnay remarks, “Americans are living longer but not necessarily working longer. This means that retirement periods are longer. Retirees today must plan for their portfolio to sustain withdrawals for 20 or 30 years.”
The Impossible Dividend Dream
Some investors may have the dream of living on dividends and interest to fund their retirement. Even with interest rates at zero, this is impossible. “Retirees need stock market returns to survive multiple decades without a paycheck. But stocks are volatile, which makes many investors uncomfortable,” observes duQuesnay.
Invest For Growth And Income
Loy says, “One way to battle inflation in retirement is to invest for growth and income in equities. Stocks tend to be a hedge against inflation because corporate earnings grow faster when there is inflation. One of the key mistakes that retirees make is moving their investments too conservatively in retirement, which makes it harder to keep up with inflation.
The best way to fight inflation before and during retirement is by investing to obtain better returns than inflation.”
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