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February 19, 2014 at 12:03 PM
Our clients are facing a serious challenge: Inflation! People do not understand inflation. In fact, many actually interpret inflation as deflation.
Simply stated, deflation is the destruction of prices of commodities like real estate, stocks, gold, etc. Obviously deflation is a serious concern. Our government will do everything it can to prevent deflation. Japan has unsuccessfully struggled with deflation for over twenty years.
But for retirees, inflation is a more dangerous challenge. Inflation destroys the value of money, thereby diminishing its purchasing power. Even a low inflation rate environment impacts retirees because of their longevity.
The government dramatically misrepresents inflation. Current inflation statistics do not include energy costs, food costs, or healthcare costs. Analysts argue that if inflation we’re calculated as it was in the past, the rate would be between 5 and 8 percent. Instead, inflation rates are being kept low to minimize the cost of living increases on pensions and Social Security.
An easy way to explain inflation’s damage to purchasing power is sharing the rules of 72 and 115. These rules are usually used to explain the compounding necessary to double or triple your money. I use them to explain inflation.
