Here’s a trick question:How much currency is enough?
Did you catch the trick?When thinking about how much we will spend during our lifetime, currency is not the correct measure, it’s money.
If we spend $1,000 today, will we get the same goods and services as spending $1,000 twenty years from now? Of course not, even though we will spend the same amount of currency.
This trick is easy to forget when building a long-term investment strategy, but it’s one of the most important factors to be considered.
I’ve heard of people who converted their entire portfolio to an annuity that will pay them 6 or 7 percent per year, thinking they’ve got their life’s expenses handled. What they aren’t counting for is the fact that while their expenses rise each year, their income will remain stagnant.
Even at a modest 3% inflation rate, their cost of living will increase by 34% in ten years.
Actually, for our poor annuity victim, their cost of living will likely remain the same (since they won’t have any additional income to spend), they’ll just have to cut 1/3rd of the food, goods, and services they buy.
That’s no way to live out your golden years! Instead, be sure your investment strategy considers inflation.
Also printed in Blackhawk Living Magazine