Good Morning Relaxing Retirement Subscriber,
Have you ever stopped to think about why we subject ourselves to market volatility where prices fluctuate wildly every day?
Why do we invest anyway?
The answer to that ties into the next step in The Relaxing Retirement Formula™.
Over the last few weeks, we’ve outlined the first few steps and you’ve gotten crystal clear on just how dependent you are on your Retirement Bucket™ today.
If you’ve come this far, and you’ve followed right along and discovered this critical number for yourself, you’re in a distinct minority because the overwhelming majority of American retirees are too lazy and unfocused to perform this critical task.
However, as much as I’d like to applaud your actions up until now, there’s a key missing factor to your number.
That missing factor is what your level of Retirement Bucket Dependence will be next year!
In 5 years?
In 10 years?
In 20 years?
Inflation’s Impact on Your Purchasing Power
Many so-called financial “experts” have been lulled to sleep over the years with inflation’s enormous negative long-term impact on your purchasing power. I continue to read articles and see websites of large financial institutions suggesting that you use 2% to 3% inflation rates in your forecasting.
This has been a big pet peeve of mine for years as I believe it’s a grave mistake to assume that the low inflation rates we’ve experienced over the last 20 years will continue forever. That would be like assuming that the double-digit inflation we experienced from 1979 to 1982 would continue forever.
Why Do We Invest in the First Place?
Investing is often described as the process of laying out money now with the expectation of receiving more money in the future.
Legendary investor Warren Buffet had a better take. He defines investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”
If you stop and think about what investing is, and why we invest, one of the major reasons is INFLATION and its punishing impact on our purchasing power.
We invest our carefully earned savings in order to have funds available for future expenses, i.e. college for our children, retirement when we no longer have a desire to work, etc.
What we choose to invest in, however, is largely driven by the historical fact that prices on everything we consume rise over time.
The biggest risk you face is not having your income stream keep pace with rising lifestyle costs. Even at modest three percent inflation, a 62 year old couple whose desired lifestyle costs $100,000 per year today will need $243,000 in the last year of their average joint life expectancy to support their same lifestyle. A 72 year old couple would still need $186,000 per year.
So, at its core, investing is about owning carefully selected assets that you believe will be able to help you maintain your purchasing power (i.e. keep pace with rising costs).
If you simply set money aside in your mattress, that would be better than not saving at all because, at the very least, you’d have the money later.
However, it wouldn’t be worth enough to pay for what it is that you set the money aside for because prices continued to rise while your money remained under the mattress.
This simple principle is why it’s so critically important to establish investing principles and guidelines for yourself.
The reason you invest, and why you’re investing in what you’ve chosen, will remain clear in your mind so you maintain investment discipline in ever-changing markets like what we’re experiencing right now.
Cost of Living Adjustments on Income
With that clarification on inflation and its punishing effect on your Relaxing Retirement fresh in our minds, let’s get back to your three potential fixed income sources that we evaluated last week and see how they stand up to inflation:
- Social Security has a cost of living factor (COLA) built in, so, in theory, it keeps pace with inflation. If your benefit is $2,500 per month right now, it will likely be approximately $3,200 per month in 10 years. (For scorekeeping purposes, you received a 2.80% COLA increase in January 2019)
- Most pensions do not have a cost of living adjustment. So, if your monthly pension is $5,000 per month, your check in 10 years will still be $5,000 per month while the price of everything has gone up!
- Rental property income should, in theory, keep pace with inflation. However, local rental market forces, and most people’s lack of tenacity in “raising the rent” each year, may have an impact on what income increases you can count on in the future. Be careful and conservative with what you expect.
Now that you know all of this, take a look out at what your fixed income sources will look like, not just today, but in 10 years, 20 years, and 30 years. Create your own personal timeline.
How does it match up with your desired lifestyle costs that you’ve calculated?
Is there a deficit right now? How about in 10 years (due to inflation)?
If there is, don’t sweat just yet. That’s why you’ve saved all of that money all your life…to supplement your fixed income and fill in the gaps when you stop working.
Committed To Your Relaxing Retirement,
The Retirement Coach
P.S. Arm yourself with the questions you must ask to determine if your financial advisor has a legal obligation to work in your best interest at all times vs. the best interest of the company they represent. To receive a free copy of the Consumer Guide titled: “The 13 Questions You Must Ask Your Retirement Advisor (or Any Financial Advisor You’re Thinking of Working With) Before You Hire Them”, simply click this link: https://www.theretirementcoach.com/free-consumer-guide-how-to-protect-yourself
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I appreciate the trust you place in us. Thank you!
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)