Friday, August 2, 2013

Should You Worry About Inflation?

Although inflation rates have been rather low people should not put down their guard. The inflation rate for last month was 1.8%.  In 2012 the average inflation rate was 2.1% and in 2011 we saw an average rate of 3.2%.  Modest rates make people less worried yet leaving your money idle for too long is dangerous.  The 10 Year Bond is currently at 2.62% and stocks have been on an upward trend since the beginning of the year.

Now let's imagine that you had retired 20 years ago and had a mixture of stocks and bonds that paid you a fixed income of $10,000 a year to use towards paying for your living expenses.  Although we are at a time that Americans are living much longer we will assume that the money will only need to last you for 20 years. If inflation in those 20 years had averaged a high of 10% your $10,000 would only be worth $1,486 in 2012 dollars, much less purchasing power as we can see.

A 10% inflation rate over a long term is not too likely but it could happen.  Now let's consider inflation at 3% which is likely to happen and yet in the short term does not seem too threatening.  With the same $10,000 payout in the past 20 years your purchasing power would have dropped to $5,536 in 2012 dollars.

Inflation is a part of life we can't afford to ignore, shop around for investments that will allow you to stay above inflation.  Allocate a percentage of your savings into securities an amount that will make you feel comfortable even if we see a drop in stocks.  In other years when interest rates were higher CDs have been good to fight inflation but do take into consideration the taxes you will pay on the yield come tax season.

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