Apr 30

Apr 30 2024 Inflation: Are 'They' Pushing You To Gamble Your Retirement?

4 min read

Inflation, often described as the silent thief of purchasing power, is a phenomenon that affects economies worldwide. At its core, inflation represents the rate at which the general level of prices for goods and services rises, eroding the value of currency over time. Understanding how inflation is measured is crucial in grasping its implications for individuals and the economy as a whole.

One common metric used to gauge inflation is the Consumer Price Index (CPI), which tracks changes in the prices of a basket of goods and services over time. By analyzing this basket, economists can determine the average price increase across various sectors, providing insights into overall inflation trends.

The chart below reveals that individuals, on average, can afford 2.88% fewer goods and services from the CPI basket each year. Consequently, the typical annual payroll increase of 2-3% observed in the job market often fails to enhance one's financial standing. These raises offer little benefit, thus raising the question: What alternatives are available?

10-Yr Avg. Inflation = 2.88%

Currently, rate of inflation is 3.48%. If we look back just 20 years, the average inflation rate is 2.55%. Various factors are at play, so conducting additional analysis is necessary to ascertain whether a sustained growth-trend is evident.

As we explore inflation's impact on retirement savings, it's essential to clarify the meaning of 'They’ in the post’s title. When we refer to 'They,' we're encompassing the collective group of individuals who influence the status of the economy. It's a broad term that includes policymakers, central bankers, financial institutions, government authorities and other entities that shape economic conditions.

Their collective actions have ‘inadvertently’ (depending on who you ask!) created a situation in which individuals are compelled to take on more risk to safeguard their purchasing power. For example, decisions made by the Fed to adjust interest rates influence consumer spending habits, investment decisions, and inflation expectations. Additionally, fiscal stimulus measures and regulatory reforms have affected consumer confidence and market volatility. In simpler terms, people are essentially facing a dilemma: either risk seeing their money erode over time due to inflation or place their hard-earned retirement funds at risk by investing in assets that must outperform the risk-free rate.

This underscores the challenges individuals face in navigating the complexities of inflation and retirement planning. It's a sobering reality that highlights the need for informed decision-making and strategic financial management in today's economic landscape.

It is evident in the news daily that ‘They’ continue their efforts to manage inflation. However, the disparity between the average salary and the cost of goods, especially those indirectly reflected in the CPI, such as real estate, is increasingly apparent. Despite modest salary growth, they have failed to keep pace with the rapid rise of housing prices and other necessities.

This imbalance presents a challenging issue for individuals striving to secure their financial futures. While the options to tackle this concern may seem limited, one cannot ignore the residual effects taking place, such as the continued growth of the gig economy, individuals opting to postpone starting a family, and the inclination towards higher-risk investments.

Bonds have always been considered a safe investment option, providing stable returns over time. However, in an inflationary environment, the real value of these returns diminishes. For example, currently a 1-Year T-Bill pays 5.21%. If you fall in the 24% tax bracket, your real rate of return is 3.96%. Factoring in the current rate of inflation of 3.48%, you’re really only getting a measly 0.48%. This translates to just $4.80 for every $1,000-dollar bond. This scenario leaves savers in a precarious position, as simply stashing money away in bonds no longer guarantees future purchasing power.

To counteract the erosive effects of inflation, and perhaps achieve a better work-life balance, many individuals must turn to the stock market as a means of preserving and growing their wealth. By investing in equities, mutual funds, ETFs and even alternative investment funds, individuals have the potential to outpace inflation and secure stronger returns over the long term. While the stock market carries inherent risks, it also offers the opportunity for greater rewards, making it an attractive option for those seeking to mitigate the impact of inflation on their finances. This, of course, emphasizes the importance of seeking professional financial advice to review your financial status and/or continuously educate yourself on investments in today’s economy.

To conclude this post, understanding inflation and its ramifications is essential for anyone seeking to navigate today's economic landscape. By recognizing the challenges posed by rising prices and exploring strategic investment opportunities, individuals can position themselves to safeguard their wealth and pursue financial prosperity despite the ever-present threat of inflation. Are you taking the necessary steps to prepare for your retirement days? Click here to get started with BMG.

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