For years now, with record low interest rates, many have come to the belief that inflation is a non-factor. Before I address that assumption, let us first understand what inflation is. In its simplest terms, inflation is an increase in the price of goods and services in an economy over a period of time. It reduces purchasing power and has been referred to as the “Silent Thief”.
Historically, inflation is said to grow at around 4% per year. That means one dollar today should be worth around ninety-six cents a year later. Go back in time with me if you would. I was born in 1960, when the average cost of a new house was $12,000, a new car cost $2,600 and the gas to put in it was 35 cents per gallon. I can remember my dad picking me up from little league. As a treat, he would take me to White Castle, where for a mere buck, I got 3 burgers, fries, and a drink and we still received change. My mom tells stories of how she and her friends would be able to purchase movies tickets and eat popcorn and candy for just a quarter. If we compare the prices then to the prices now for those same goods and services, we see examples of the silent thief creeping into wallets and stealing hard earned cash.
Now as we all know, we are in a record low interest rate environment. If you want any proof, just head down to your local bank and ask them how much they will pay you for a C.D. or Money Market account. To gauge current inflation, the Bureau of Labor Statistics publishes the Consumer Price Index (CPI). Last year, the official rate was a mere 1.2%. That sounds great, doesn’t it? It’s far lower than the 4% we’ve been told all our lives. However, a close look at your recent grocery store receipt might reveal that the food prices have risen more than 1%. This is because corporations are generally pretty adept at marketing, manufacturing and packaging.
My favorite potato chip (I know…It’s not exactly health food) costs 99 cents. The price has not changed. What has changed is the amount of chips I get for 99 cents. It may not seem like inflation, but it is. And how about the price of gas? It’s not uncommon to currently see $4 per gallon at the pump – and that’s assuming you don’t have to use premium. It doesn’t seen that like ago when you could walk in the station and ask for $10 on pump #5. Nowadays, depending on the type of car you have, $10 barely moves the gas needle. In addition, anyone paying for college tuition or keeps up with health care costs, knows first hand that inflation is real.
What does the future look like for inflation? Based on the financial commitments made in Washington after the housing meltdown of 2008, higher inflation rates are more than likely to come. If you hold your assets in low yielding accounts (Other than emergency funds), you are losing money. This is especially true if your money is in a pre-tax accounts (e.g. IRA’s 403(b)’s), where withdrawals are taxed at up to 39%
So, what can you do? Consider placing some of your assets into an account that can: 1. Protect your principal 2. Allows you to potentially receive interest higher than many fixed instruments are currently paying, and 3. Allows you to withdraw a cash flow of 6 or 7% for life while passing the remainder to your heirs.
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