The stories your parents told you about buying a candy bar for a dime are true. The goods and services that one dime could buy in 1950 is equivalent to about $1.10 in today’s money1. It’s tempting to plan for retirement based on the prices of today, but the impact of inflation cannot be overlooked. 

Based on life expectancy tables, someone retiring at age of 65 could expect to live another 20 years or so. The Fed is currently targeting a 2% inflation rate2. If consumer prices rise by 2% for the next 25 years, a expense that costs $50,000 today will cost $82,030 in the future. 

Impact on your investments
Cash is probably the most susceptible to inflation risks. Having too much money in your savings or checking account could become costly long term. Interests rates on those accounts will not keep up with inflation. The interest rate on my Chase savings account is 0.01% and my high yield savings account is 0.50%. For that reason, I only keep my emergency savings in those accounts and invest the majority of my money. I recommend keeping short term expenses in cash (1 year or less). 

Fixed income including bonds, treasury bills, CDs etc. are slightly better than having cash sit in the bank. Bonds are generally less risky than stocks, but their returns are normally lower. Inflation can be deadly to fixed income investments because it often causes interest rates to rise which lowers the value of bonds. A possible solution could be buying inflation-indexed bonds (TIPS). Fixed income investments may be a good spot for money you may need short term (1-3 years).   

Stocks can be an effective way to combat inflation. Stocks have produced the highest inflation-adjusted return of any major asset class over the long term. During periods of high inflation, in theory a company’s revenue and earnings should grow at the same rate as inflation. The downside of stocks is the volatility. Therefore, you should keep your long-term money in stocks and short term money in more conservative investments. 

Real Estate generally benefits during periods of high inflation. For most people, their home makes up a large chunk of their net worth so adding more exposure to real estate may be risky. The downside of real estate are periods of high inflation can lead to higher interest rates which make it harder to get an affordable mortgage. Also, some locations are in higher demand than others and that can lead to fluctuations in property value. 

Commodities usually rise from unexpected inflation. Generally, commodities are broken up between hard and soft. Hard would require mining or drilling and soft refer to things the are grown or ranched.  Owning a portion of commodities in your portfolio can help to hedge against inflation but over the long term they have underperformed equities and some have suffered larger drawdowns than stocks.

Protecting your future
If you want to maintain your lifestyle in retirement, investing to beat inflation may be essential. At PMG Wealth Management, we factor the in long term effects of inflation when building financial plans. Based on your specific situation, we make recommendations to help mitigate these risks and ensure you have the proper strategy to pursue your goals.  

Disclaimer & Definitions

Inflation: a sustained increase in the general level of prices for good and services
TIPS: Treasury Inflation: Protected Securities provide protection against inflation. TIPS increase with inflation and decrease with deflation, as measured by the Consumer price index. (Read more here)
Hard commodities: Gold, copper, and aluminum, and energy product like crude oil natural gas, and unleaded gasoline
Soft commodities: refer to grown or ranched such as corn, wheat soybeans, and cattle. (Read more here)
1. BLS Inflation Calculator Here
2. Fed – Targeting 2% Inflation Here

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss.