Inflation Eating Away at Investments?
While driving home from work, the radio talk show hosts were ranting about the pending return of inflation. The stories ran from scary to not-so-numbing numbers. But what was on my mind was the question: Are my retirement earnings keeping up with inflation?
What sparked this lightbulb moment? I had just gotten off the phone with one of my community bankers, who was renewing my 12-month CD for 3.75%, down from my last 5.00% return.
Of course I was bummed at the decline, but then considered it in light of the business experts’ realistic projected rate of inflation – 4% for the year. Wait, I just got 3.75% on my 12-month CD! Hmmm…that means my money is not keeping up with inflation.
So, I mentioned my concerns to CFOEd over lunch, where he added his thoughts on inflation:
“With inflation on the rise, you need to increase the minimum return you are seeking on the investments in your business and in personal finance. Many businesses are raising their minimum return rate in response to higher inflation. For example, a few years ago, the minimum return was around 9%. Today for many companies it is closer to 10%. Losing 1% due to inflation may not seem like a big deal for one year, but it is significant over time. From a personal finance perspective, suppose you have $100,000 invested with an expected return of 9%. The value of the $100,000 in 20 years is $560,441. Now inflation increases 1%, so you need to earn 10%. If you can earn the 10% (don’t trick yourself into thinking you can just earn it by investing in riskier assets) the value of the $100,000 in 20 years is $627,750. The 1% required increase may not seem like a lot, but if you continue to earn 9%, you are short $112,309!
So take heed and see if you need to feed your earnings with alternatives—growing your business, or your career, or working with your investment advisor to keep those shortfalls to a minimum.
No one wants to have their retirement eaten away…except for maybe on delicious dinners on exotic travels!