There are many forms of financial risk – currency risk, market risk, credit risk, company risk, industry risk, economic risk (don’t forget crooked executive risk). And the list goes on and on. I’ll submit to you that the biggest risk is inflation risk. What the dollar buys today it will not buy in five, ten, twenty or thirty years. It will continue to buy less and less each year. We don’t feel this risk, so I refer to it as the stealth. Many people I see have said to me that they paid more for their last automobile than for their first home. That is inflation. The government has come up with an acronym to follow it – the CPI (Consumer Price Index.) Can the government do anything without an acronym? They’re going to need a new acronym for politicians who vote themselves out of this world pay plans.
The bottom line is things keep getting more expensive. If you retire today and avoid cancer & heart disease there’s a reasonably good chance that you may see your 90th birthday. If that’s the case your income will need to triple to keep up with the increase in price of the things around you. If you have $70,000 in retirement income today, you’ll need $210,000 in thirty years to buy what $70,000 buys today. Although most people focus on account balances, the focus should be placed on annual after tax income. It is not about the account value, its all about the after-tax income you can spend and enjoy. Remember, 0% return is equal to 3.1% after tax. Inflation has averaged 3.1% from 1919 to today. Lower now and higher in times such as the late 70’s. If you are not earning at least 3.1% after tax on your money you are actually losing money to inflation. Did they tell you that when you opened that bank account?