I receive a fair amount of feedback from my readers in the form of mail, emails and phone calls. I love to hear from all of you, as it give me a gauge as to how my writing affects you, helps you, and sometimes just makes you laugh! Last month I received a two page handwritten letter from a gentleman (let's call him Mr. C.-I was a big "Happy Days" fan... AAYYYY!). His letter brought me to an immediate stop, and after reading it through 3 times, gave me reason to pause, pour a cup of tea, ponder his thoughts and admire the man who wrote it for hours and days to come.
Based on his letter, Mr. C. is an avid reader of my column; 91 years if age, self sufficient, and from what I could read, very financially savvy. He wrote, and I quote: "Regrettably, while we struggle to put away those dollars to live on in retirement, there is a hidden enemy stealing it: inflation. He arrived in the USA in 1939, and his father's annual salary was $2400. Rent was $20.00 per month, and the average home price (to those most fortunate to afford it) was $7,000. There were no $100 dollar bills, and the $50 bill was rarely seen- most retail vendors would not accept them. He moved to Rockland in 1960 and paid $20,000 for his house, with an annual tax bill of $350. Now, for those of you who are homeowners, I will take a pause to let you stop laughing! He talked about the classic TV show "The Millionaire" where John Breford Tipton used to donate "the fabulous sum of one million dollars" to see what he or she would do with it. And then, brilliantly, Mr. C. pointed out the sum of $1,000,000 in 1939, due to inflation, had the purchasing power of $30,000 in today's dollars. Mr. C., you are a man far ahead of your time, and I thank you for both your letter and your shining insight to one of the most overlooked and under considered facets of a retirement plan.
When talking about risk, we most think about losing our stuff due to theft. In money terms, would it be safer putting it under the bed, or in the safe deposit box? Well the chances of if totally disappearing are slim, but the risk we expose ourselves to is theft, fire, flood, or in the case of us aging, just forgetting where we put it! There are many definitions of risk, but for now, let's examine two that work hand in hand: purchasing power risk and inflation risk. Simply put, if we have 3% inflation as a long term average, that means that the dollar we have today will buy .97 cents worth of goods and services next year this time. Let's use Mr. C. as an example- he is living well past retirement age, as mortality tables show that we are living longer and longer life spans due to advances in medicine, better living conditions, healthier environments, and for the most part, a better standard of living. Most investors go by the old theory (note that I say old) that in retirement; your portfolio should be just about all fixed income vehicles, giving you income and little risk to principle. While I agree that security of principle is very important, ponder this: just because you retired this year, does that mean that the price of a car, a load of bread or your next article of clothing isn't going to go up in price next year? Of course not. If you are using your portfolio for income, as a pure hypothetical, you would be conservatively taking income derived from your portfolio-let's use 4% in today's economic environment. Add to that taxes to the income, inflation of 3%, fees for management, and if you don’t grow by 8-10%, you may just be losing future purchasing power of your portfolio dollars. Since there are no guaranteed fixed income instruments in today’s investing environment giving you that type of return to my knowledge, it's a risk vs. return dilemma. If you live 30 years past your retirement date, the retirement nest egg you have at the day of retirement using $100,000 as an example reduced by 3% inflation would have the purchasing power of $41,198 in today's dollars- hardly the ability to support you in your year of retirement, nor 30 years from now. It's the goblin we all have, but don't see. Inflation must be considered in your retirement planning to keep you from outliving the purchasing power of your money.
My gratitude to Mr. C. for taking the time to write, and to point out this very important fact to me and for the benefit of our readers. You are gentlemen, a veteran, and a respected member of our community- on behalf of all of us, I thank you.