By Michael Schimmel
“Bacon’s the best. Even the frying of bacon sounds like applause. Bacon bits are like the fairy dust of the food community.” – Jim Gaffigan, comedian
Talking about bacon is always fun. It can even help illustrate a topic that has been in the financial media a lot lately: inflation.
In 1991, the price of a pound of bacon was $2.22, according to the Bureau of Labor Statistics. Thirty years later, in August 2021, a pound cost $7.10. That’s inflation at work. Inflation is simply the rise in the cost of living, and it eats away at your money’s purchasing power and may not buy as much retirement in the future as it does today.
Over the past several months, inflation has crept back into the financial media limelight. Last year, price increases began to grow out of pandemic-related shutdowns and supply chain disruptions. As an example, the Consumer Price Index, a key measure of inflation, climbed 5.4% in September 2021 compared to the prior year.
Inflation and retirement planning
When you retire, one thing is a given: The cost of basic necessities as well as other things you enjoy will continue to rise. The following table provides some hypothetical examples to help increase your awareness of inflation.
Prices in 2021 are based on Kmotion Research and general averages, including data from the U.S. Labor Department’s Bureau of Labor Statistics. Projections for 2051 prices assume a 3% annual inflation rate.
Get real with inflation
When managing inflation risk with your investments, it’s important to understand a couple of basic terms.
Your nominal rate of return is the amount of money you make on an investment before expenses – this rate of return does not take inflation into account. Your real rate of return is t he nom i n a l return on your investment minus the inflation rate, and it gives you a better sense of the purchasing power of the money you make from your investments. For example, if your investment portfolio earns an 8% rate of return in a particular year, and the inflation rate is currently 3%, your real rate of return is just 5%.
Conventional wisdom says you should consider keeping an appropriate amount of your assets allocated to stocks and stock mutual funds to help offset inflation risk. Although past performance is no guarantee of future results, historical average stock returns have stayed ahead of inflation over the long term.
Note: This material is for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Please consult a financial advisor or other appropriate professional for further assistance with regard to your individual situation.
The writer is an advisor at Fellows Financial Group, an independent financial services firm servicing clients throughout the Washington metropolitan area, who majored in political science and economics at Miami University in Ohio. He has worked for global and national banks from HSBC Bank to Wachovia in various financial services capacities.