I know - BORING - right? Inflation is a boring subject just because it is a future event and doesn't hold much of a problem right now. But right now is when you absolutely must deal with the inflation problem. My grandfather made 500% on the sale of his home. Unfortunately he didn't live long enough to see the results of his purchase. Why did the house sell for so much?
Inflation!
Using simple math and looking around the neighborhood at home prices it is easy to see that housing costs about 500% more than when he originally bought that home. But that's not all. Cars, food, utilities, gasoline, health care, and pretty much everything increased in price about the same amount.
If your investments are not indexed to inflation then you are losing money or purchasing power to the destructive power of inflation. It is a destructive power to fixed income portfolios. It is also a destructive power to poorly performing portfolios. Why does it matter?
Your retirement could last 20-30 years! If that is the case your purchasing power could decrease by 3-4% per year. At that rate you would lose at least half of your purchasing power during retirement. In other words if you usually get a new Caddy every year then eventually you will have to downgrade to a car that is 1/2 the price.
Or one half the vacation, one half the golf, one half the income to help at church, and so on. No you income doesn't decrease but the cost of everything increases over time. To learn more about one solution read - Variable Annuities And Long Term Growth.
Image by Petcoffr at Flickr.com
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