The Not-So-Hidden Cost of Inflation
When Gladys retired from the phone company in 1997 at age 60, she was very happy with her $800-per-month pension and the $1,200 per month she was earning from certificates of deposit. Her monthly expenses were about $1,500, which left enough for an occasional trip.Fifteen years later, Gladys is still collecting $800 per month a month from her pension, but only $900 a month in interest from her CDs. Her monthly living expenses now are $2,400, and she has been dipping into her principal to cover the difference.
With 100% of her money invested without protection for the rising cost of living or decreasing interest rates, Gladys has reason to worry. Although she felt comfortable at the time she retired, she doesn’t at age 75. And since she’s in great health, she could live another 15 years. Over longer time periods, the erosion in the buying power of your investment dollars can be as bad or worse than the effects of periodic market downturns. The risk to keeping all of your money in bonds or CDs is that is that it may not grow enough to meet inflation.
Younger investors should pay close attention to the risk of generating low returns, but so should younger seniors, who may not be using a significant portion of their assets for a decade or more. You may wish to talk to a financial advisor to discover strategies that allow your savings returns to keep pace with or stay ahead of inflation.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this education material.
