Monday, May 31, 2010

The scary reality of retirement

Kiplinger carried this article illustrating the effect of inflation on real incomes over periods of time.

To put the article in perspective:

1. a person who retired 10 years ago on a fixed income would now be facing a 20% reduction in real income;
2. a person who retired 20 years ago on a fixed income would now be facing a 39% reduction in real income;
3. a person who retired 30 years ago on a fixed income would now be facing a 62% reduction in real income.

(Although not stated, I assume that the adjustments have been done using US CPI numbers.)

This sort of data really demonstrates the inadequacy of most standard retirement plans that advocate spending principal for living expenses and having a substantial portion of assets in cash or fixed income. Even in a low inflation environment, the very blunt reality is that you need more than you think you need and you need to invest substantially in assets which have at least some chance of keeping up with inflation. The earlier you retire the more essential this becomes. Any other approach to avoid risky assets like shares and property is a plan to face a declining standard of living and ultimately poverty as you age.

And for those who think that inflation adjusted securities are the answer, this thread on the early retirement forum is worth a read - inflation adjustments have not kept pace with the actual cost of living faced my many seniors. In sort, for the elderly the corrosive effects of inflation are even worse than Kiplinger suggests.

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