Inflation: The Bug That Bites Your Retirement Savings

If you’ve participated in your employer’s retirement savings plan for a while, you’ve likely watched your balance grow over time. Over ten years, a "safe" 6% return on a $150-a-month contribution can grow to more than $24,000.¹

But it’s ten years later. How much will today’s $24,000 buy? About the same as $16,200 did ten years ago. The dollar has lost buying power to inflation, which is an unfortunate fact of life. This example assumes 4% inflation, roughly the rate at which the dollar has shrunk yearly since World War II. However, like investment markets, inflation has up and down cycles. As a savings plan participant, you should take its force into consideration when you choose investment options.

Investing to Preserve Principal
When is it appropriate to choose a low-risk investment? For most of us, every fiber of our being aches to put our money where we can’t possibly lose. After all, we work hard for it, and we don’t want to frivolously gamble what we’ve put aside.

The rub is inflation. When you choose a "safe" investment with a low return, it surrenders much of its growth to inflation and the loss of buying power.

Investing to Preserve Earning Power
An alternative: If you are close to retirement, you may choose to reinvest some of your balance in lower-risk instruments to support you for the first five or six years. Choose higher returning investments for the rest. A few years should be enough for your higher risk investments to recover if they suffer a downturn just before or after you retire. Their higher returns are more likely to provide you with an income stream later on while your low-risk investments support you in the near-term. You’ll have created a balanced portfolio. Its return will probably end up producing less than an all-stock portfolio, but it should beat inflation over the long haul.

¹This hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. Investments do not typically grow at an even rate of return and may experience negative growth.

Please remember that past performance is not a guarantee of how an investment will perform in the future. Investment returns fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost.

This article is intended to provide helpful information, not investment advice. You are responsible for making your own investment decisions and may wish to consult with a financial planner.

Copyright © Frank Russell Company 2003. All rights reserved. Important Legal Information Date of first use 3/23/00.

This is a publication of Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Frank Russell Company. Frank Russell Company, a Washington, USA, corporation, operates through subsidiaries worldwide.