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This Could Destroy Your Retirement

I'm sure none of us has spent time with our grandparents without hearing statements like "I remember when the movies only cost a quarter" and "A thousand dollars sure doesn't buy what it used to."

After a few college economics courses, I simply chalked it up to stuff that grandparents say. Obviously, they just didn't understand the forces of inflation compounded over 40 years.

What a smart aleck
But after a recent trip to the grocery store, I caught myself sounding like my grandparents. "Four dollars for milk?" I lamented to my wife. "I remember when a gallon of milk cost $2! And that was just a few years ago."

Without getting into a complex macroeconomic analysis as to why milk prices have doubled in eight years (thanks, ethanol), my trip to the grocery was a valuable reminder of inflation's destructive power.

I don't even want to think about what a gallon of milk will cost when I retire. But I'm still going to want it on my cereal, so it's best to develop a plan now so I can still enjoy my Apple Jacks when I'm 70.

Affording $12 milk in 2040
According to The Economist, the average world inflation rate has risen to 5.5%. The U.S. is enjoying 3.9% inflation. In emerging markets like China and India, prices have risen 8% to 10% -- and those are the official statistics.

Try outpacing those rates with Treasury bills. At present, you'd actually be losing purchasing power by investing in most Treasuries.

When it comes to battling inflation, our only good defense is a good offense. That means keeping an appropriate allocation of your portfolio in equities, even well into retirement.

For example, the Vanguard Target Retirement Income Fund (VTINX) allocates a full 30% of its assets in equities using these funds:

Fund

% of Fund Assets

Top Holdings

Vanguard Total Stock Market

23.5%

Cisco (Nasdaq: CSCO  ) , Procter & Gamble, Johnson & Johnson (NYSE: JNJ  )

Vanguard European Stock Index

3.4%

BP, HSBC (NYSE: HBC  ) , Vodafone

Vanguard Pacific Stock Index

1.5%

Toyota (NYSE: TM  ) , Sony, BHP Billiton (NYSE: BHP  )

Vanguard Emerging Markets

1.2%

ChinaMobil, Petrobras (NYSE: PBR  ) , America Movil (NYSE: AMX  )

Sources: Vanguard and Yahoo! Finance.

It should be noted that this Vanguard fund is designed for investors currently in retirement. The further you are from your ideal retirement age, the greater the percentage of your portfolio that should be invested in equities.

Bring inflation to its knees
See, prices will continue to rise for the rest of our lives, and equities give us the best chance to not only keep up with inflation, but even stay ahead of it in order to increase our purchasing power down the road.

If you're not sure how to begin saving your retirement from inflation, our Motley Fool Rule Your Retirement service can help. In the most recent issue, for example, advisor Robert Brokamp discussed ways you can use different asset classes to improve your returns while reducing overall risk. This way, you not only battle inflation, but also sleep a bit easier at night.

To learn more about this strategy and countless other retirement tips, consider a free 30-day trial of Rule Your Retirement. You can take advantage of our offer by clicking here. There is no obligation to subscribe.

Todd Wenning knows you gotta dip, you gotta doodle, you gotta eat Grandma's strudel. 'Cause she stayed up all night to make it from scratch. He owns shares of Procter & Gamble but of no other company mentioned. Petrobras and Johnson & Johnson are Motley Fool Income Investor recommendations. The Fool's disclosure policy gives respect to the Grandma.


Read/Post Comments (3) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2008, at 3:14 PM, SilverMoney wrote:

    Vanguard has some good funds, like their tax sheltering Municipal fund. I believe Dick Cheney is heavily invested in Vanguard. But hands down the best investment to make in these times are precious metals. The value of gold and silver can not be inflated with the printing press and fractional reserve banking the way the US dollar is being inflated right now.

    The Federal Reserve made the M3 money report secret so we would have no official benchmark for inflation. Economists estimate that inflation has exceeded 16% each year for the last two years.

  • Report this Comment On June 26, 2008, at 4:01 PM, SaraRaRa wrote:

    If you are worried about inflation of commodities, wouldn't it make more sense to invest in a commodities ETF like RJI? Those Vanguard funds have done well in the past, but they may or may not do well in a commodities bull market that we seem to be entering. A commodities ETF keeps up with inflation by definition.

  • Report this Comment On June 26, 2008, at 5:01 PM, kamuirei wrote:

    Precious metals are often victim to speculators... they're far less regulated (true for commodities in general).

    The commodities bull market is not something new... the question is now when will it end. Right now commodities are hitting all time highs, the S&P is at a 1 year low and nearing a 2 year low. For the long-term, stocks are the better option.

    I honestly see no point to buy commodities directly. You get exposure through companies heavily involved in them.

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