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In The Money June 12th, 2008

Articles that discuss the earning of money, the investment of money, the saving of money.

The Biggest Risk of All

photo

John E. Richardson, Jr.
CPA - CFP

Certified Financial Planner
Senior Financial Advisor
for Strongtower Financial

When it comes to investing, many people equate risk solely with losing their money. They have an irrational fear of ever seeing their retirement savings drop in value. While I understand that is certainly a cause for concern among retirees, it is not the only risk. Sometimes the biggest risk a retiree can make is putting all of their money in FDIC insured bank accounts and allowing inflation to erode away their purchasing power over the course of their retirement.

First of all, you have to understand that the average couple today will likely be retired for many years. In fact, a married couple today who are age 62 and non-smokers have a 50% chance that one of them will live to be at least 92 years old. That's another 30 years!

Secondly a little inflation over a 30 year retirement can have a devastating effect on purchasing power. Here is what that means to you. Given that inflation over the last 30 years has averaged 4.15%, a car that costs you $8,000 in 1978 costs you $25,982 today. Sound about right? Now, let's look into the future. That car that costs you $25,982 today will cost you $84,384 in 30 years. Let's put it another way. Suppose you can live comfortably on your retirement income of $84,384 today. In 30 years that will only buy what $25,982 buys today! That certainly won't work for my clients.

Given that current FDIC insured C.D. rates nationwide are less than 4%, they can't even keep up with inflation. Can you believe $139 for a barrel of oil? Does anyone remember the 70's? The high cost of oil fueled a much higher inflation rate.
While I certainly believe retirees should maintain a heavy cash position, banking solely on cash investments like C.D.'s for your retirement savings is unwise. If this is your strategy, you are virtually guaranteeing that you will run out of purchasing power in your retirement. The FDIC may be able to insure depositors will get a return of their money. However, the FDIC can't even begin to insure that they will get an adequate return on their money. Ignoring the relentless march of inflation and totally avoiding all market and credit risks over your retirement may be the biggest risk of all!

 

 



 

 

 

 

 

 


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