Consider Inflation On Your Retirement Savings

    Published: 06-16-2009
    Views: 12,483
    Financial advisor Ric Edelman discusses the importance of considering inflation when saving for retirement.

    Ric Edelman: For most of our nation's history people never retired they died, but luckily things are different today. People who are 65 can expect to live another 20 or 30 years and that means, if you're 60 you need to be just as concerned about inflation as someone who is 30.

    Yet most retirees and pre-retirees believe that their only worry is safety, wrong. Since 1926 according Ibbotson Associates inflations has averaged 3.

    2% per year and that means the cost of living doubles every 23 years. Instead of worrying about safety, you should be worrying about affording food after inflations erode your income in the years to come. You don't want to run out of money before you run out of life. Too many retirees ignore inflation, don't make that mistake.

    If you're retired or soon will be you might be tempted to stash all your money in CDs but that could be a terrible idea. CDs are among the most volatile of all investments, even considering the stock markets declines of the past decade. You know realize this though because you're looking at CDs the wrong way. Let's say, you invested $10,000 into a 1 year CD back in 1981. The interest rate back then, would have been about 15%, you would have earned $1500 and interest that year, not bad, but that rate only lasted one year.

    By 1986 the rate was down to 7%. The income on your CD would have dropped by more then half. By 2009 when your CDs paid only 1.

    7 percent, if you're retiree relying on CD income during that time, you would have seen your income plum it, and the cost of living went up. You would have needed $3500 in 2009 to buy what $1500 bought in 1981; the solution is a systematic withdrawal plan. Being by building a diversified portfolio, this doesn't mean putting all of your money in the stock market. There are many different types of investments out there. Turn to a financial advisor for help with this or use my guide to portfolio selection at ricedelman.

    com.

    In an ideal world, you'll have a diversified portfolio throughout your life. You won't need a dramatic make over when you retire. Once you have a diversified portfolio you can withdraw money from it at a rate of no more then 5% per year. You can easily set this up, so that your check or direct deposit arrives like clock work every month, just like social security. If you use a systematic withdrawal plan your account balance will fluctuate, but so what you're income is stable and that's your primary concern, don't believe the myth, that you need to move your investments to CDs when you retire, because now you know the truth.