Nasty Mr Inflation – Part II

Nasty_ManLast time, we looked at dealing with inflation before we retire (a.k.a. Life After Work), to see that $40k a year of current needs means that you need to be able to generate somewhere between $100k and $125k per year, IF you want to retire in 30 years.

Even if we manage to build up the $2.8 million nest egg that Pinyo talks about (or the $1.8 million one that the following reader talks about), we have a problem, illustrated by the comment by Elaine on Pinyo’s post:

I don’t see interest included in the calculations here. Even at 4%, *just the annual interest* on 1.8 million will cover your annual needs. Not that that’s a bad thing, you’ll still have 1.8 mil left when you die. If you plan to use up all your money in retirement the necessary amount would be quite a bit lower.

Elaine has ‘forgotten’ about inflation; this doesn’t stop just because you retire!

You earn 4% on your money and before you get to spend any of it, Mr Inflation ’spends’ 3.5% for you … I asked Elaine if she can live off just 0.5% of $1.8 Million?

When you retire, if you have your money just sitting in the bank, inflation will simply kill you, financially-speaking.

On the other hand, if Elaine buys a $1.8 mill. rental property (paying 100% cash, forgetting closing costs) the property will increase in value WITH inflation, as will the rents … an inflation-proof retirement (or, she can buy TIPS, inflation-protected government bonds … etc., etc.)

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3 thoughts on “Nasty Mr Inflation – Part II

  1. There are (at least) two problems which arise when trying to protect against future inflation (apart from the uncertainty over how much inflation we will experience).

    The first is that, in this context, inflation is a personal thing. It is quite possible that your personal rate of increase in living costs will be higher than the general rate of infation. If this happens there is a risk that investments which were intended to provide protection against inflation will provide less than 100% inflation (even if those assets appreciate in line with general inflation which is not a given).

    The second problem with using property is that the income from property is a net item: rent received less various expenses. Even if the rent increases in line with inflation, it cannot be assumed that the expenses will not increase at a higher rate (property taxes in many countries have been rising well above the rate of inflation for a number of years). In this situation, the net income from the property will not increase at the same rate as general inflation.

    There are of course other ways in which the performance of the investment can vary from either personal or general inflation.

    It is of course possible that property will perform better than general or even personal inflation, and in any case, I view property as one of the better inflation hedges available.

  2. I can’t imagine a world where inflation will be less than 5% with the sort of spending that our governments are doing now. I am planning on it being 5-7% during the next 20 years.

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