Inflation: The “Invisible” Factor That Can Hurt Your Purchasing Power

Inflation: The “Invisible” Factor That Can Hurt Your Purchasing Power

Should you move most of your money from stocks to bonds to take less risk now that you are nearing retirement?

An old rule of thumb is that you should have as much of your money invested in fixed invest­ments, like bonds, as your age. The rule indicates that if you are age 65 you should have 65% of your money in bonds and only 35% of your money invested in stocks. This may seem attractive if you are hoping to reduce volatility and minimize market losses, but what about the “invisible” risk factor of inflation?

Inflation eats away at your purchasing power in a slow manner so we don’t really feel the pain on a yearly basis. Inflation of just 3.5% per year will cause your cost of living to double in just about 20 years. Statis­ti­cally, a married couple both age 65 today has a 58% chance that one of them will live to age 90; a 50% chance one will live to 92; and a 25% chance one of them will live to reach 100. This means most retirees will need to plan for a 30 year retirement.

The good news is that life expectancy continues to go up with advances in medicine, and pretty soon, 90 will be the new 60! The bad news is that many people are not planning for inflation over this long time frame. If you stop trying to grow your money and become too conser­v­ative, you may lose purchasing power which could lead to financial trouble down the road. You should probably get a second opinion from a Certified Financial Planner® before making any dramatic changes to your retirement plans.