Here’s an investment idea for the too-safe, too-conservative and too-much-cash folks.
It has one of the few guarantees on Wall Street…
In fact, it guarantees to return 3% less every year than it did the year before. That means that if you retire at age 66, by age 90, your nest egg will be worth half of what it is worth today.
Sounds beyond stupid, right? But that’s exactly what retirees who ignore inflation or who are unaware of its effects are doing. They’re guaranteeing a loss of at least 3% every year.
Yes, I know – inflation is not at 3% now. But that’s its long-term average, and it’s guaranteed to be there year after year and decade after decade.
Death and taxes aren’t the only guarantees in this life.
And this guaranteed loss occurs at two levels. The first is the most obvious: 3% a year coming right off the top of everything. But the second loss isn’t quite so clear.
Inflation is called “mean-reverting.” Simply put, history teaches us that low-inflation periods have always been followed by high-inflation ones.
Between 1950 and 1969, we had a similar situation to the one we have today: Inflation sat slightly above or below 2%. But that was followed by a period from 1970 to 1989 where inflation was just below 6% to 7.5%, and went all the way up to double-digits in some years.
If history is our guide, 6.5% is more than a possibility, and that would reduce the buying power of an unprotected nest egg by almost 50% in just 10 years.
Today, the average retirement is 18 years. (Based on my reading, 25 years seems more realistic. But let’s use the 18-year figure.) With a 6.5% return over 18 years, your buying power would drop by something in the area of 70%.
Let’s put this in real-world terms.
I put a roof on a small cottage a few years ago. It cost $11,000. In a 6.5% inflation environment, in just 18 years, that roof would cost around $35,000.
On the low end, at just 3%, that’s still $19,000.
We have been lulled into complacency by years of low to no inflation. Losing 50% to 70% of your buying power in retirement is the shortest route to poverty.
Take this inflation thing seriously, folks. Ignoring it is the easiest way to wake up broke in your 80s.