The REAL Risk to Your Financial Future

People who are saving for retirement tend to focus their attention on movements in the stock market, believing that a bear market is the greatest danger to their financial well-being.  

And they’re wrong.

There’s no question that a severe bear market can put a temporary dent in your buying power.  But the key word there is ‘temporary.’  Incrementally, over time, our economy—and the companies that make up our economy—tend to grow at somewhere between 2% and 4% a year.  There can be significant swings in sentiment—what people believe these companies are worth.  But below the waves, the aggregate value tends to continue on a growth pattern.

So what’s the real danger?  In a word: inflation.  

We’re constantly reading that the inflation rate is up or down, and how that will impact the markets.  But the more important issue is how it impacts your buying power.  Over time, the buying power of the dollars that are stored under your mattress has tended to decline at a remarkably steady long-term rate.  Every year, they become less valuable.

The long-term inflation rate (since 1913) is around 3%, which doesn’t sound like much until you consider the idea of your investments declining by an average of 3% a year.  Something you purchased for a dollar in 1913 would cost roughly $32 today.  If you bought something for a dollar in 1980, you would expect to pay just under $4 for it today.  

Inflation is like a mouse nibbling away at your dollars, year by year.  If you can’t stay ahead of it, then you’ll find yourself poorer (in terms of buying power) as you approach and enter retirement.  That’s not just a risk; it’s a certainty.

The interested reader can do these inflation calculations for yourself on https://www.usinflationcalculator.com/, where you input the year where something would have cost a dollar, and then this year (or any other year) to see the specific erosion of value.

Historically, the only way to stay ahead of inflation has been to participate in the stock market’s long, bumpy, sometimes scary ride.  And that begs the question: which is riskier, an unpredictable market with a strong underlying upward bias, or hoping your dollars will suddenly reverse course and retain their value when you need them in retirement?

Source:

https://www.usinflationcalculator.com/