Business News & TipsAlan S. Moore / L’Observateur / June 9, 1999During the last few years, inflation has remained steady – a sharp contrast to the dramatic increases during the late ’70s and early ’80s.
Published 12:00 am Wednesday, June 9, 1999
However, any level of inflation can significantly affect your retirement nest egg. It is important to understand the damage inflation can inflict onyour retirement portfolio and to learn strategies that will help you protect your retirement assets.
Over the last 45 years, inflation has averaged about 4.5 percent annually. Using a modest figure of 3 percent, let’s take a look at what effect inflation has on your money. If you currently earn $100,000 per year, youwill need to earn $103,000 next year ($100,000 x 1.03) in order tomaintain your present standard of living. In years two, three, four, andfive, you will need incomes of $106,090, 109,273, $112,551, and $115,927, respectively, just to stay even with inflation.
Inflation clearly has an adverse effect on the spending power of your money. Not only can inflation eat away at your salary, it can also limit thereturn on your retirement investments. For example, if your retirementportfolio consists of investments that return the same rate as inflation, you are essentially not making any money. Along the same lines, if yourinvestment returns average 8 percent, you can reasonably expect inflation to eat away about 3 to 4 percent, based on historic figures. Of course,nobody can predict the future-what if inflation increases and diminishes more of your investment returns? A common and often effective antidote to inflation is to build a retirement portfolio that invests in diverse asset classes. Some assetclasses, such as stocks, do tend to outperform the rate of inflation.
However, other asset classes, such as bonds and money market investments, provide stability and less risk. If you’re young and concernedwith building a strong financial base for your retirement assets, a portfolio heavily invested in stocks might suit your long-term goals.
However, one should not underestimate the power of bonds and money market investments. While investors who are close to or already inretirement might want to invest a bit more conservatively, they should also consider a diverse portfolio designed to provide maximum income while staying ahead of inflation. For any individual, a good mix canprovide inflation-beating returns without taking undue risks.
Retirement can be the most rewarding period of your life. Talk to yourfinancial advisor today about strategies designed to help you conserve and perhaps even grow your retirement nest egg.
(Alan S. Moore is a financial advisor at Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.)
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