Inflation is defined as: “A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.”
To simplify matters a bit, it means the government has been deliberately debasing the value of our money for years, in order to meet its political policies
In 1912, you could purchase tickets for the finest first class three room suite on the Titanic for about $4350 US. Remember there was no income tax back then.
If the Titanic were still around, that suite would cost about 86,120 after-tax dollars – about $112,000 pre-tax, assuming a very modest 30% tax rate.
It is impossible to predict what inflation will do over the next 23 years, but over the last 23, inflation was devastating. What cost $1,000,000 in 1983 would now cost about $1,910,000 in 2005 – the last year for which numbers were available. Or put another way, what cost $523,500 in 1980, now costs a cool million.
The US dollar lost almost one half of its buying power. Imagine if you retired in 1983 on a $1000 a month fixed pension. At the end of 2005, it could only buy $523 worth of goods, if there were no such thing as taxes. Let’s be gentle and only reduce your pension by 15% for taxes – now you only have about $444 in buying power.
The early 80’s had high inflation and interest rates, which have fallen over the years. But the figures given above only reflect a 3.9% inflation rate.
I am using 1983 for a reason. The leading edge of the baby boom generation is turning 60 right now. The average male life expectancy for a 60 year old is 22.8 years. At 65, the life expectancy goes to 18.9 years. (The overall life expectancy for someone born in the US today is 77.6 years.) So the typical baby boomer will be around for about the next twenty three years.
As the United States grew, its leaders decided that they could not afford first gold coinage and later silver coins. Eventually, the US abandoned the gold standard and just began to print bits of paper backed by “the full faith and credit of the United States.”
The problem with that is that the government can and does print as many of these bits of paper – dollar bills – as they feel like. The only value they really have is that which people choose to give it.
Now we are even moving away from paper currency to a “cashless” society. You could spend a large portion of your life never handling currency of any kind if you choose to do so.
But that brings us back to inflation. As trade deficits soar and with the government trillions of dollars in debt, people start to assign less and less value to those bits of paper or those electronic entries on your bank statement.
The problem is that the paper money really has no intrinsic value.
So how do you protect yourself against inflation? The answer is simple, but hard to implement. You just have to make an after-tax return on your investments greater than the inflation rate.
This is hard to do with cash or money market investments. The interest rates rarely exceed the inflation rate, either pre or post tax, and the value of the cash is constantly deteriorating.
Let’s go back to the Double Eagle. In 1933, the last year it was minted, it had a value of $20 - it would buy you $20 worth of goods and services. You can still buy that double eagle today, but its numismatic value distorts the equation.
In April 2006, gold bullion is selling in the range of $595 per ounce. The Double Eagle’s reincarnation, the American Eagle, which contains an ounce of gold, sells for about $618.
It now takes $270 to buy what cost $20 in 1933. But gold is selling for over twice that amount. So the intrinsic value of gold has doubled, while the US dollar has fallen by half over a much shorter period of time.
Obviously gold has a much higher intrinsic value than paper currency and, for that reason, is attractive to investors.
Even after you have reached your “golden years”, you have to be aggressive with your investments. One share of General Electric stock - representing maybe one 50 millionth ownership of the company - has more intrinsic value that the dollar bill in your pocket.
So you have to stay invested in either the carefully picked stocks of financially solvent companies or in no-load, low cost, quality mutual funds.
Corporate and tax free bonds should play a role in diversifying your assets into something that holds up better than cash.
From there, there is an infinite supply of investment opportunities some of which are quite risky.
But holding real estate or Real Estate Investment Trusts (REIT’s) or gold coins, bullion, gold stocks or mutual funds will help you safely diversify among assets that are likely to not only hold their value, but appreciate better than inflation.
You cannot rely on your pension payments retaining their buying power, nor can you expect the government to control itself.
So keep inflation in mind and go after higher yields than you will get on your savings account. Otherwise you might outlive your money.
By: Chris Cooper. For more articles on retirement planning and personal finance, visit Credit Yourself.
Article Source: http://EzineArticles.com/?expert=Christopher_Cooper
