According to a survey by the Society of Actuaries, one of retirees’ biggest fears is investment losses. According to their 2021 study, 66% of pre-retirees are concerned the value of their savings and investments might not keep up with inflation. 41% of retirees share this concern.
This begs the question: is your money safe at the bank? Of course it is, assuming that the bank is solvent. And even if the bank runs into financial trouble, the Federal Deposit Insurance Company (FDIC) steps in to make sure that you can get your money back (up to certain limits). So yes, your principal is safe – but that’s not the full story.
Inflation and the Loss of Purchasing Power
Safety of principal is important, but there may be an even more important risk to consider – one that financial planners and retirees also worry about a great deal: the loss of purchasing power, or simply inflation.
This house is suffering from inflation.
To give inflation some context, consider that the U.S. life expectancy has been going up steadily over the last 100 years:
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- In 1914, the life expectancy for a woman was 56.8 years.
- According to the Social Security Administration, a female age 65 today will live to be 86.8 years old.
- That is nearly a 53% improvement.
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We have good reason to believe that this increase in life expectancy will continue due to rapid advancements in medical research. What does that mean for you? A very long retirement.
To illustrate the effects of leaving money in a guaranteed account (i.e. cash savings account), consider these three facts:
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- In 2000, a stamp cost $0.33.
- Today, that same stamp costs $0.60.
- That is an increase of almost 82%.
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Or put another way, that is an 82% loss of purchasing power. If you left your money in the bank, inflation could present some problems.
For retiree’s, putting money in the bank feels like the right choice. The retiree wants to protect the money, to keep it safe. (Some funds should always be in a safe investment, like a cash savings account.) Yet, with enough time, holding all your money in the bank sure won’t buy as many stamps today!
Inflation is just one of the many kinds of risk that can affect your money. All these risks must be considered when creating a safe portfolio for retirement. Doing so ensures that you will not run out of money in retirement because of the loss of purchasing power.
Editor’s note: This article was originally published in May of 2014. It has been updated to reflect today’s data and republished.
Sources
Greenwald Research, Inc., (2021). 2021 Risks and Process of
Retirement Survey Report of Findings. Retrieved from The Society of Actuaries: https://www.soa.org/resources/research-reports/2021/retirement-risk-survey/
Noymer, A. (1998). Life expectancy in the USA. Retrieved from UC Berkeley Department of Demography:
https://u.demog.berkeley.edu/~andrew/1918/figure2.html
Social Security Administration. (n.d.). Calculators: Life Expectancy. Retrieved from Social Security Administration:
http://www.ssa.gov/planners/lifeexpectancy.htm