Inflation and Investment Risk

By |2021-10-26T15:27:36+00:00October 26th, 2021|Retirement Planning|

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” – Ronald Reagan

Most investors only consider the risk to their principal, which is why they favor Certificates of Deposit over non-FDIC insured investments for their most protected assets.

The risk of lost buying power is a more complicated dynamic.  The dollar value of principal stays the same, but year after year, a dollar buys less and less.   This happens so gradually over time. A gallon of milk increases a few cents over months, and it is easy to tune out the constant, low-level increases in utility fees like electricity, shipping of goods and services, gasoline, heating fuel, and water delivery.

Inflation is insidious this way, and it varies so widely over the range of goods and services that it is difficult to gauge the true effect on an individual basis.  For example, individuals paying for their major medical coverage who are experiencing any health care issue were noticing double-digit spikes in the year to year increases in health insurance and medical care, and if health care costs become a significant percentage of purchases on any given year, the massive erosion of health care buying power can affect the risk of loss from inflation.  Individuals who are young, healthy, or receiving high-quality coverage from their employers may not see health care inflation affecting their buying power nearly as much.

So noticed or not, inflation is real, and it can vary widely based on an individual’s circumstances.  What can a traditionally conservative investor do to make sure their FDIC-insured Certificate of Deposit keeps up with or even beats the current inflation rate?  Keep reading!

Regardless of what bucket an expense is dumped in, a variable you must contend with as you plan your retirement is inflation. It’s likely that the cost of goods and services will increase, and you’ll need more at retirement than you do now to enjoy the same things. To offset inflation, your income must rise each year.  Assuming you don’t go back to work, this income must come from a pool of assets that is also growing.

Inflation is dangerous, the most perilous roadblock in retirement planning.  Inflation is the Conservator Investor’s largest and most focusing problem.  Inflation must be calculated into any responsible plan.

The US Department of Labor Bureau of Labor Statistics maintains an inflation calculator.  Here is the link:

What is Inflation?

In simple terms, inflation can be defined as either a rise in prices or a fall in the value of money. The short answer is, “An increase in the cost of things that are necessary for humans to live and enjoy life, such as bread, butter, milk, cheese, coffee, oil, shelter, clothing, medical services, chicken, cotton, and electronics. Or “a decrease in the value of money so that it takes more dollars to buy the same goods and services it did in the past.”

Some inflation is caused because a country has printed too much money or experienced a financial disaster, causing its currency to plummet. Other sources of inflation can be higher input or transportation costs such as gas, which makes it more expensive to ship goods to retail stores, increasing costs for consumers. The consumers, in turn, have a harder time affording stuff such as toilet paper, toothpaste, jeans, paper, cars, lamps, furniture.

Relating to Inflation with real-life examples: 

Since the 1950s, inflation has increased average prices by 1,000% or more as of November 2018.

Example 1: a postage stamp in the 1950s cost 3 cents; today’s cost is 48 cents – 1,600% inflation.

Example 2: a gallon of full-service gasoline cost 18 cents before; today, it is $3.65 for self-service – 1,667 % inflation.

Example 3: a new house in 1959 averaged $14,900; today’s average home costs $282,300 – 1,795% inflation.

Example 4: a dental crown used to cost $40; today it costs $940 – 1,950% inflation.

Example 5: An ice cream cone in 1950 cost 5 cents; today, you’ll spend $3.50 – 5,900% inflation.

Example 6: several generations ago, a person worked 1.4 months per year to pay for the government; now, it takes five months.
Also, in the past, the one wage-earner families lived well and built savings with minimal debt, and many families paid off their home and college educations for their children without loans. How about today?

Few citizens know that a few years ago, the government changed how they measure and report inflation as if that would stop it – – but families know better when they pay their bills for food, medical costs, energy, property taxes, insurance, and try to buy a house.

Inflation is part of our lives and part of our retirement planning; it must be dealt with.

Here is a link for up to date information on current and historical inflation rates:




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