Angels and Assholes #10…2016 - The Silent Sneaky A-hole: Inflation

The Short Version: 65% of people think they can get by, when they’re done working, on less than half of their pre-retirement income. They’re going to have a surprise, a rude surprise when the silent thief leaves them without any money.

The Expanded Version: I still look at an online version of the Star and Tribune each morning, with my cup of coffee, here in the Bahamas before I head off for more adventures in paradise. This morning I came across a survey in an article by Mark Miller of Reuters that, although I am more involved in writing fiction these days, alarms me.  After leaving teaching, I am so grateful for having wandered into financial planning as a second career. First, it made me aware of what I had to do to help all my kids through school, help my grandkids, provide a family retreat in northern Minnesota, and escape the non-spring up there in places like the Bahamas. But mostly I am grateful to have gotten the chance to have other people be able to do similar things. Being able to do this has nothing to do with how much you make but how much you keep. So, it bothers me when I see people rationalizing themselves into financial trouble.

Mr. Miller pointed out that only 19% of people age 55 and older have a plan for retirement. Believe me—you need to know how much you need in savings and investments to live the way you plan on living or there are going to be unpopular surprises. 

He points out 30% have accumulated $250,000 or more. If this sounds like a lot, do you realize $250,000 can only create $12,500 in income without risking principle. And 33% have less than $25,000 saved or invested! They’re paying everybody but themselves. I realize wages have been stagnant, but Facebook friends, that’s not a problem you can spend your way out of.

Maybe the stat that scared me the most is that 65% of people rationalize that they can live on half of their pre-retirement income.

When you’re investing, time and compounding are your angels. When you’re drawing income, they’re your demons. The longer you live, the more, due to inflation, you may need to dig into principle…and negative compounding occurs. Even the same income drawn from a declining source and quicker than you imagine: slup! It’s gone.

But, your income needs will not stay the same. When I speak to college students I always tell them to ask their grandparents what cost more: their first home or last car. People don’t consider the effects of inflation because it’s the sneaky, silent a-hole. Al 3-4% inflation – the long term average—costs double every 20 years.

This isn’t written to make you feel bad or as a commercial for MunkebyKramer Financial, but a commercial for becoming aware of your financial situation before it’s too late. If you have no plan, don’t be surprised when you pull your head out and there’s nothing there.