Don't Let Inflation Corrode Your Buying Power

The Wall Street Journal reported Friday that economists surveyed by Dow Jones expected the Labor Department to report an increase for September in its producer-price index, which is a measure of what manufacturers charge, after having fallen the previous month.

Is this a precursor to higher inflation in our future? No one can possibly know for sure. That is why we believe in Asset Class Investing and don’t try to guess or outguess the markets.

Investors should, however, always be concerned about inflation.

Inflation’s impact on our wealth is just like rust on metal -- over time it corrodes.

Our increase in longevity due to medical advances means we have even more time to feel the effects of inflation and we need to be even more cognizant of how inflation can erode our buying power.

For retirement income planning purposes we talk to our clients about using 95 years old as the age our clients need to have as a goal to have a secure source of income. Probably in the not too distant future that number will move to 100 years old!

Here is an example of just how serious the impact of inflation can be. Lets assume a couple retires at age 65 and needs $100,000 of income from their portfolio during their first year of retirement. To keep up with inflation at year 10 they will need $134,391.64, year 20 they will need $180,611.12, and on year 30 the sum rises to $242,726.25 they need to pull out of their investments.

Stated another way, $100,000 worth of buying power today with inflation nibbling away at 3% a year will be worth $41,198.68 in 30 years.

You can input your own numbers using the inflation calculator found at moneychimp.com (scroll to the bottom of the page).


Is there a “primer” we can apply to our portfolio to prevent this corrosive effect of inflation?

Yes. Maintain exposure to equities throughout your lifetime. The long-term expected return of equities provides the growth to allow investors to maintain a prudent income stream over a lifetime adjusted for inflation.