Inflation and Retirement
It is important for people saving for retirement to carefully consider their investments and allocations because inflation is a relentless force that erodes purchasing power through time. At 3% inflation, everything cost twice as much every 24 years.
People tend to be mindful of the absolute dollars they have. What they don’t see is the erosion of their purchasing power that goes on every single day. If you have $1mm today and still do so in 24 years, your purchasing power will have likely eroded to $500k.
To offset this erosion, people saving for retirement should develop a long-term capital appreciation strategy. The asset class that best serves this purpose is stocks. In investing for retirement, I recommend a broadly diversified portfolio of exchange-traded funds split up into small, medium, and large companies, domestic and international.
Inflation is and should be a concern for everyone. Of course, it’s more of an issue for those nearing or in retirement because their portfolios should be constructed such that they handily outdo inflation and provide them with an increasing income stream through retirement. Having a portfolio consisting solely of stock ETFs means there will be volatility. After all, there’s a price to pay for the return you get.
So as retirement approaches, I recommend saving up two years or more of your budgeted expenses in cash in an Emergency Cash Reserve account. That way, when, not if the market takes a dive to bear market territory, you transition away from selling stock ETFs for income and instead transition to taking cash from the Emergency Cash Reserve account.
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