With 10,000 people retiring every day, we are reminded of the start of a big city marathon. The image of runners clogging the starting line stretches back into seeming infinity, waiting for the signal to start a 26.2-mile run. Some of them will sail, and some of them will fail. Others will make it, but not without a struggle. But one thing is sure: the ones who succeed are the ones who know what is in front of them and are prepared for it. The race for success in retirement similarly hinges on us knowing what challenges may confront us and learning how to meet them. When people talk about inflation, you will hear terms like “contained” and “under control” tossed about. That leaves the impression that it is a monster in a cage that could someday escape and wreak havoc on our retirement savings. And that’s a pretty accurate assumption. 

The frog and inflation

The effects of inflation are not sudden and dynamic; they are slow and erosive. If you were to put a frog into a pot of boiling water, the frog would jump out right away. But put the frog in water that is room temperature and slowly turn the heat up, and the frog will allow itself to be cooked without protest. Now, before you sic the animal rights people on me, I have never done this to a frog. I have no intention of doing this, and I certainly don’t encourage anyone else to do this. I love frogs. I love all amphibians, as a matter of fact. I merely use this example to show the slow, insidious effects of inflation on our wealth.

Why do we have inflation?

If you could lay your hands on a 1913 $50 bill, you would find across the bottom of the bill these words: “United States of America Fifty Dollars In Gold Coin Payable to the Bearer on Demand.” All paper currency, in fact, used to be backed by pure gold. Over time, however, the dollar was taken off the gold standard. All links with gold were officially severed in 1971. Eventually, the value of paper money was more or less set by a designated agency of the government and measured by a more complicated formula based on the economy in general. The government has the authority to print money, but the more it prints, the less the currency is worth. The less the currency is worth, the fewer goods and services a unit of the currency will buy. Inflation is when prices of goods and services rise, usually followed by a rise in wages.

When all currency was based on gold, there could be no inflation unless new gold reserves were located. There seems to be a movement underway to return to the gold standard. So far, it has received little traction toward becoming law.

Those who remember the high inflation of the late 1970s and early 1980s can recall when interest rates were in the high teens. Demand raced ahead of supply, and by 1980, the inflation rate had surged as high as 13.5 percent. By comparison, the inflation rate of 3.5 percent in 2011 is probably considered downright attractive! But inflation is still a wealth killer. We may tend to take it lightly because it is benign. “Three percent? That’s no big deal!” you might say. “That’s only three cents on the dollar!”

But just three percent, if not adjusted for, can seriously erode our financial independence in retirement. Just ask those who have been retired for 20 or 30 years if inflation has had any impact on the purchasing power of their fixed incomes.

A penny saved…

One way to counteract inflation evaporation is through thrift. If inflation is at three percent, then save three percent. As a financial advisor, I love the concept of saving money. Benjamin Franklin is one of my personal heroes. He is the one who coined the timeless proverb, “A penny saved is a penny earned.” If prices are outrageous, wait for a sale. Beat the system by clipping coupons. If you have a dollar-off coupon for something you truly need, it’s jackpot time. However, beware of shopping just for shopping’s sake. That just defeats the purpose.

Saving isn’t always saving. One way not to fight inflation is to stockpile your money into certificates of deposit that are paying one percent or two percent interest when inflation is around 4 percent. Not only do you have a net loss of the difference, but if you add in the interest you could have earned with a more sensible, and still safe, investment, then you are taking two giant steps backward. Losing money safely is still losing money. Competent financial advisors will be able to point people toward defined accounts that have contractually guaranteed growth that will still pay more than the inflation rate. A desirable feature of these accounts is the ability to move from one interest-generating environment to another inside the product.


Coach Pete and his team offer complimentary retirement strategy sessions to Chapelboro readers. Contact them at 919-657-4201.