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According to a survey by the Society of Actuaries, one of retiree’s biggest fears are investment losses. According to their study, 56% of retiree’s are “apprehensive that their investments will lose value in retirement.”

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.

Safety of principal is important, but there may be an even more important risk to consider – one that financial planners and retiree’s also worry about a great deal: the loss of purchasing power, or simply inflation.

House With Balloons
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:

  • In 1914, the life expectancy for a woman was 56.8 years.
  • According to the Social SecurityAdministration, a female age 65 today will live to be 86 years old.
  • That is over a 60% improvement.

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:

  • In 1993, a stamp cost $0.29.
  • Today, that same stamp costs $0.49.
  • That is an increase of 70%.

Or put another way, that is a 70% loss of purchasing power. If you left your money in the bank, inflation can present some problems.

cost of a stamp

For retiree’s, putting money in the bank feels like the right choice. They 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 sure won’t buy as many stamps today!

Stamps

Inflation is just one of the many kinds of risk that effect 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.

Sources
Brandon, E. (2012, April 9). How to Hedge 7 Retirement Risks. Retrieved from U.S. News:
http://money.usnews.com/money/retirement/articles/2012/04/09/how-to-hedge-7-retirement-risks

Mathew Greenwald & Associates, Inc., (2013). 2013 Risks and Process of
Retirement Survey Report of Findings. Retrieved from The Society of Actuaries: http://www.soa.org/Files/Research/Projects/research-2013-retirement-survey.pdf

Noymer, A. (1998). Life expectancy in the USA. Retrieved from UC Berkeley Department of Demography:
http://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

 

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