The silent enemy of American retirement is returning. It robs retirees' buying power when controlled. Uncontrolled, inflation will destroy everyone's retirements, a factor exacerbated by longer life expectancies. Living 20, 30 or even 40 years retired will not be unusual in the decades ahead. To maintain quality of life, retirees must plan for inflation. Our industry is uniquely positioned to encourage these discussions.
A recent Time Magazine cover article discussed the demise of 401(k)s. In 1998, the average 401(k) balance was $47,004, but at the end of 2008 the average account was only $45,519. How long will that last in retirement?
The article made that information even more powerful by explaining that $100 of purchasing power in 1998 equated to $73.32 of purchasing power at the end of 2008. This drop occurred during one of the lowest inflationary periods in our country's history.
Damaging your retirement
This means that if you are not making money, you are effectively losing money and damaging your retirement, even during periods of low inflation. What could happen to your buying power
during a decade of high inflation?
Most Americans don't understand inflation. Be sure your clients do understand. Here are a couple of ideas to consider as you develop your own ways to explain the concept.
I explain inflation several ways. First, when you have more of something, the value decreases. If we found more diamonds, their value would decrease. Discover more gold, and its value will diminish. When additional money is printed, the value of that money declines. The U.S. government just printed a lot of money.
The velocity of money
But we aren't experiencing massive inflation yet because inflation requires a second factor: the velocity of money. Besides creating more money, we must use it. Banks did not lend. They used the created money to repair their bottom lines. When banks finally start to put that money into the economy, we will have massive inflation. Are you and your clients prepared?
I also share the rules of "72 and 115″ to explain the impact of inflation. Let's use 3 percent inflation for our example. If you divide 72 by 3, it shows that in 24 years you will need twice as much money to maintain your current standard of living. Three percent into 115 determines that in 38 years you will need three times as much money to maintain your current standard of living. The next question should be "How will you do that?"
Don't forget to deal with inflation or your clients will suffer the consequences.
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