FINANCIAL FASTLANE TIP: Understanding Inflation

By February 9, 2018Blog, Media

Hi, I’m Scott Carter from PM Capital, with another investment tip from the financial fast lane. Here’s the fast lane tip, real inflation is a significant risk to achieving our retirement dreams.

Did you know that the BLS, which is the US Bureau of Labor Statistics, has changed the definition of inflation over 20 times since 1980? Few investors realize that the methodology to calculate core inflation was changed in 1980, to take out volatile components such as food and energy.

So now core inflation excludes some of the main things we need to actually live, like gas and food. If the CPI, which is the broadest measure of inflation, was calculated using the methodologies in place in 1980, well you can see from the Shadowstats chart inflation would actually be 8% instead of 2%.

Understanding real inflation is critical to investors, because if your investments, or long term savings, are not growing at least at the same rate as real inflation, you’re not preserving your purchasing power. And your money won’t stretch as far in the future.

Here’s an example of how inflation can hurt your retirement plans. If you’re a 55 year old today, who plans to retire at 70 years old, and live another 20 years after that, and you need $100,000 a year to live on. What you need to save to that available to you changes dramatically, depending on inflation. If we assume a 5% investment return on your money, with no inflation, you’ll need $1 million saved in order to live on $100,000 a year for 20 years, after you retire. Now, with just 3% inflation, the amount doubles to $2 million. That’s a big difference in your retirement nest egg needs, just due to inflation.

That’s why we say inflation is a critical risk factor you have to understand in your investment strategy. And the real inflation numbers have to be understood so you make the right investment choices, in order to have enough money during your retirement years.

The basic point is this, to preserve your wealth in retirement, you have to preserve your purchasing power. That’s where PM Capital can help, we’re in the wealth preservation business. We don’t want you to be income rich and retirement poor. Diversifying your portfolio now could help you preserve your buying power later.

I’m sure you’re continuing to put your training into action. But we look forward to talking with you about your personal goals for a balanced portfolio, when we set up your consultation that was a part of your training package. Remember, even though real inflation is a serious threat to your retirement dreams, if you diversify today with real assets, you can help hedge against this risk, on your path to financial freedom.

Scott Carter

Author Scott Carter

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