Inflation: The enemy of long-term investors, especially women

BY JULIA ANDERSON
The Campbell Soup Co. is raising prices on an array of grocery items by fall.
Crude oil prices are hitting three-year highs, boosting the gasoline pump price by 95 cents a gallon from a year ago.
 
As restaurant operators struggle to hire and retain workers the cost of eating out has skyrocketed. Yes from home construction materials to automobiles, prices are rising.
 
These increases on a market-basket of goods and services tracked by the U.S. Department of Labor are running at an estimated overall 6 percent a year. Our cost-of-living is going up. In other words, we have an INFLATION problem.
 
After more than two decades of keeping inflation at bay, we all are talking about it and what to do about it.
 
Economists say a bit of inflation in the range of 2 percent a year is OK, but 4-percent, 6-percent, 8-percent a year is a hardship especially on retired people with fixed incomes and on women who tend to save less and are more conservative investors.
 
Inflation is the invisible enemy that eats into your buying power and your long-term savings and investment strategy. Here’s why:
 
Let’s say you save $1,000 in a bank savings account. If the cost-of-living increases by 2 percent over the next 12 months, the buying power of that $1,000 drops by $20 to $980. That’s because as prices increase it will take more money to buy the same stuff.  
 
Twenty dollars may not seem like a big deal, but if the cost-of-living increases at 2 percent a year for 10 years, the buying power of your $1,000 drops to $800. In other words, your $1,000 of savings takes a 20 percent hit over those 10 years.
 
Here’s another way to look at inflation and how it undermines investors. You have $200,000 in a tax-deferred savings plan such as an Individual Retirement Account or a 401(k) through your job. You lose sleep at night when stock markets go down, so you have your money in “safe” money market funds. You just can’t stand seeing your retirement savings drop in value if markets retreat.  
 
The inflation problem
 
The problem? Money market and bank accounts are paying you nothing on the savings. The Federal Reserve Bank is keeping interest rates low, near zero, to stimulate the economy as it rebounds from the Covid-19 pandemic. Unfortunately, inflation at 6 percent this year is outpacing your savings by a lot. Your money is “safe,” but you actually are losing money on the safe savings. If it keeps up, your $1,000 will lose $60 of purchasing power in just the next 12 months.
 
Meanwhile that $200,000 retirement account is losing buying power, too, unless its value grows at least even with the inflation rate. Better yet your long-term investments should be gaining on inflation.
 
To review, over 10 years with little or no interest income on your $200,000 money market account, you effectively lose $40,000 of buying power if the inflation rate holds at around 2 percent. If the cost-of-living jumps to 6 percent a year over ten years, you lose $120,000 or 60 percent of your buying power on the $200,000.
 
Beating inflation requires confidence
 
This is where risk vs. reward comes in. In the current financial environment where ordinary bank savings, money market accounts and certificates of deposit are paying little or nothing in interest, you must look for other ways to “GROW” your investments. It is counter-intuitive but safe money in a bank with no interest is not safe.
 
If you are working, use the 60/40 ratio of stock investments vs bonds or other holdings. Stock index funds work best because they spread the risk and are low-cost. Management fees should be under 1 percent on the value of the fund. Use the fund dividends paid quarterly to reinvest by buying more fund shares. Over time you will be happily rewarded by the “miracle of compound interest” growth in the value of your savings investments.
 
Diversify by spreading your investments over several growth categories – real estate investment trusts, shorter-duration bonds, Treasury Inflation-Protected Bonds, or individual dividends-producing blue-chip stocks. So, research to determine long-term performance and management fees.
 
Looking ahead
 
If you don’t have the confidence to do this on your own, hire a financial consultant for a one-hour session to advise you. Or take your nest egg to an adviser to manage. Just make sure you know how much in fees you are paying them for the privilege.  
 
Keep in mind that some inflation around 2 percent a year is normal. Historically over the past 20 years that’s about what we’ve been seeing. Also remember that being too conservative with your savings is a liability. You must accept some risk to earn the rewards.
And beside, The Fed is counting on the inflation surge to abate as the economy gets back to a more balanced supply-demand ratio. But a lot of stimulus (money) has been dumped into the economy. Normal may take awhile.
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Historically, U.S. equities (stocks and stock funds) have generated an average 5 percent to 7 percent return annually. They must form the bedrock of your long-term financial plan.
 
FOR MORE:
 "Worried about surging inflation? Here's 3 ways to protect your wallet from taking a hit, Bankrate.com, click here. 
"Warren Buffett's top tips for beating inflation," Bankrate.com click here. 
"9 Assets for Protection Against Inflation," Forbes, click here.