Inflation is the greatest threat to your future Retirement

As a CFP® focused on financial literacy, one of the most foundational concepts for 30 & 40-year-old investors to understand is what we've discussed in prior newsletters: risk & volatility are not the same thing...and in fact, are often mistaken for one another, which can lead to negative long-term results.

Well, the second part of that truism is that money & currency are not the same thing…and confusing the two can be equally damaging for clients in their 50’s and 60’s as they approach retirement.

(To be sure, mistaking money for currency is equally damaging if you’re in your 30s and 40’s, but it’s something we see more frequently with people already at “retirement age.” Nevertheless, because we are all planning to reach that stage of life (our 60’s) in the future & because I don’t plan on writing a 3rd book anytime soon, I think it worth exploring this reality here in the here and now.)

Because money does not simply equate to the number of currency units that you have in your bank account, wallet, or 401k. Money, once properly defined, means purchasing power... or “How many goods & services can I buy with what I have?”

How do I know this?

Well, given that inflation has averaged about 3% over the last 100 years, if you had $1mm in your bank account in 1994 and you had “maintained” that same $1mm account value here in 2024, that account would only be worth 40% of what it could buy you 30 years ago. Put more simply, you have lost $600,000 (!!!) of your “money”, despite having the exact same number of currency units (Ie: it still says $1mm in your account).

Read that back again…it’s crucial. Why does it matter that you still have $1,000,000 on “paper” if that money can only support/generate 40% of your initial retirement living costs. You have “lost” money over time…without even truly realizing it.

And therein lies the rub.

Retirement is not, chiefly, about the preservation of capital. In fact, being primarily focused on preserving your currency units as you approach retirement age can be the surest way of ensuring that you will run out of money later on IN retirement (again, understanding that the only proper definition of “money” is purchasing power and that a focus on preserving your “account value” will lead to inflation ravaging that purchasing power over time.)

Why did I use 30 years in my example? Well, the average 62-year-old non-smoking couple today must plan for their money to last over a 30+ year retirement (as one of you, is likely to be around at age 92! [1]).

So the question needs to be asked: Why do we treat people approaching retirement as if they only need to preserve their “money” for a few years?? Statistically speaking, they should plan to make their money last for THE NEXT 30 YEARS!

Their investment strategy and retirement distribution strategy should be cognizant of this reality. In my opinion & experience, ONLY utilizing short term vehicles that limit volatility & suppress growth (which is what we really mean when we say “preserving capital”) is not a rational 30-year plan. It can be a recipe to run out of money in the latter stages of your retirement. (Of course, short term reserves have it’s place in retirement but there is a point of diminishing returns.)

Common financial wisdom treats 65 years old (and their investing needs) like they are already 90-year-olds (and even then…are you focused on leaving a legacy to family? Do you think about generational planning? Alas.)

Instead of a focus on preserving capital, retirement is fundamentally about...

1. Outpacing inflation each decade in retirement (capital appreciation)
2. Generating stable & increasing income throughout retirement (protected lifetime income)

If you do not have a retirement strategy that is driven by the fundamental need to outpace inflation THROUGHOUT this 30+ year period, you may need to rethink your retirement strategy as you haven’t yet built out a program designed for your money to last longer than you do. (This is why I often pick on target date funds…target date funds become more conservative as you approach retirement….meaning that the appropriately balanced & diversified portfolio of equities that allowed you to grow your money through your 40’s and 50s automatically turns into a low-growth portfolio of fixed income & cash that can hinder your ability to actually live through the next 30 years retirement.)

As you explore your own retirement planning: Here are the questions to ask yourself...

1. Am I limiting my ability to outpace inflation by following the masses?
2. Where will my retirement income come from? (What accounts should I pull from?)
3. Will it be enough to retire on? (How much do I actually need?)
4. Are my assets (and the income it generates) designed to fund & maximize a (potentially) 30 year retirement?
5. Do I have a plan to protect against sequence of return risk?

As always you can schedule a 15 minute "Right Fit" call here so we can figure out together if there's more you can be doing now in your financial world.