The Monster That Will Eat Your Retirement

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It's a terrible monster, one of the worst ever seen.

One U.S. president wanted it whipped.

His successor called it "dangerous" and demanded urgent action to defeat it.

It was finally driven away by a very tall man, who had to resort to drastic, unprecedented measures.

It has stayed quiet and docile for many years.

But now there are whispers and rumblings throughout the land, warning that this monster will soon rise again. And it could wreck your financial future if you're not prepared. Are you?

What the heck are you talking about?
I'm talking about inflation, the tendency of prices to go up -- or put another way, of money to lose value over time. A little bit of inflation -- 3% or so -- is normal in a capitalist economy, even healthy, say many economists. But many folks fail to account for it when planning for financial goals a decade or three in the future, and that's a failure that could prove very serious given our current economic situation.

Inflation isn't one of the problems our battered economy is serving up right now. But there's a real chance that some of the drastic measures being taken by the world's central banks -- throwing a lot of new money into the global economy -- could lead to serious, double-digit inflation a few years down the road.

But even if it doesn't, inflation is something you need to be thinking about.

Let the tall guy kill it again. Why should I care?
Because your money needs to grow faster than the rate of inflation to really grow, and it will need to grow that much more if the inflation rate takes a leap -- even if "Tall Paul" Volcker and others in the administration manage to bring it under control after a year or two, it'll still take a big bite out of the buying power of your savings. Those Treasury bonds might not be as safe as you think.

Wait. Treasuries are as safe as it gets. Right?
Yes and no. If you bailed out of the stock market and bought Treasuries last fall or winter, you're probably earning less than 4%, maybe a lot less. That isn't going to cut it over the long term. Even if you bought TIPS -- "Treasury Inflation Protected Securities," with an interest rate that adjusts for inflation -- the premium over the inflation rate isn't going to give you much if any growth. Not enough to retire on.

TIPS will preserve your capital, but if you need growth to achieve your long-term goals, you need to get back into the stock market. If you're still in stocks, you need to be smart about what you own.

Uh-huh. The S&P 500 is lower now than it was 10 years ago. How does that help me?
The S&P 500 is not every stock in the stock market. It's an index of big U.S. stocks, and the biggest -- names like, oh, Microsoft (Nasdaq: MSFT  ) and General Electric (NYSE: GE  ) , just to pick a few -- have much more impact on the index's movements than smaller companies such as Wynn Resorts (Nasdaq: WYNN  ) and Pulte Homes (NYSE: PHM  ) .

Many of those big-name stocks have gotten torched recently, but lots of folks have made good returns in the last decade with stocks, whether chosen on their own or via mutual funds. Not just crazy flyers like Dendreon (Nasdaq: DNDN  ) , either -- boring old Altria (NYSE: MO  ) has more than tripled over that time, if you count reinvested dividends and the value of the Philip Morris International (NYSE: PM  ) spinoff. You can find lots and lots of other examples. But you didn't need to own individual stocks, or even world-beating mutual funds -- even index funds have worked out for those who owned a diversified set of them.

The Fool's retirement newsletter, Rule Your Retirement, maintains a set of "model portfolios," asset allocation guides for retirement investors. Their long-term model -- which is all in stock mutual funds, by the way, and is designed to be easy to implement with almost any 401(k) plan -- has returned 26% over the last 10 years. That's almost enough to have stayed ahead of inflation even during the one of the worst periods for stocks in history -- and not bad for something that just about anybody can do with half an hour of effort a few times a year. And with a little more effort, you can do a lot better.

Long story short
Here's what I hope you'll take away from this: It's not enough to just "save for retirement." If (for instance) the average price of a new car is $60,000 when you retire instead of $20,000, and if you'll need $3 to buy what $1 buys now, just "saving" might not give you enough money to do what you want to do.

As Foolish retirement guru Robert Brokamp said in the latest issue of our Rule Your Retirement newsletter, "having just two figures in mind -- the current value of your portfolio and your retirement date -- isn't the best way to think about your nest egg." The "best way" Robert describes includes taking inflation into account, as well as a couple of other small but important shifts in mind-set that can help you build a much better retirement without adding a lot of work along the way.

If you'd like to read his article -- I heartily recommend it -- help yourself to a 30-day free trial of Rule Your Retirement. The trial gives you full access, so while you're in there, check out those model portfolios I mentioned -- you might find that a better investment strategy is easier to implement than you think. Just click here to get started.

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement. Get the tips you need to turn your retirement savings around in our special report, "How to Make the Most of Your 401(k)" -- just click here for instant free access.

Fool contributor John Rosevear has no position in the companies mentioned in this article. You can try any of our Foolish newsletters free for 30 days. Microsoft is a Motley Fool Inside Value recommendation. The Fool's disclosure policy has been buying polyester leisure suits on eBay and studying those old Travolta videos just in case that 1970s beast decides to make a big-gold-chain-bedecked return.

Read/Post Comments (5) | Recommend This Article (30)

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 April 30, 2009, at 9:05 PM, jc09058 wrote:

    I have always been surprised how many people do not consider inflation to be a issue when it come to retirement or even long-term wealth growth. I had talked with a lot of people trying to explain to them exactly what it is and how it hurts your future.

    Well, I found a way to explain it that people can understand. A lot of people know about or have heard how compound interest is a wonderful thing and except it as valid. The best way to explain inflation was this: it is nothing more than inverse or reverse compound interest.

    It can eat up money as fast as you can make it or faster, if you don't keep track of it constantly.

  • Report this Comment On April 30, 2009, at 9:32 PM, xetn wrote:

    A distinction needs to be made here; inflation is defined as the increase in the amount of currency in circulation. This is a result of two things; the Fed creating money out of thin air and the fractional-reserve banks lending money that it does not have (when a loan is made, a credit is made to the borrower's account and a debit is made on the bank's assets (loans). No actual cash changes hands. The type of inflation you are describing in this article is "price" inflation. This is a direct result of the inflation of the money supply. A simple illustration: if the total amount of currency is 10 $1.00 bills worth $10.00, and the Fed prints (creates out of thin air, 10 more $1.00 bills, what do you think the value of the 20 $1.00 bills is worth in terms of purchasing power? There are many factors that can and do affect the purchasing power of the currency (banks are not lending, they are building reserves; people are not borrowing/spending, they are liquidating debt. If and when banks start lending and consumers start spending the value of the currency will drop like a rock; think Zimbabwe.

  • Report this Comment On May 01, 2009, at 1:45 PM, madmilker wrote:

    a 5 & dime tat will eat your lunch...

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

    quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

    People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

    50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

  • Report this Comment On May 08, 2009, at 1:56 PM, bricks79 wrote:

    We are currently in a deflationary environment and will be for the next two years. Inflation will return but solid analysis will show you that bonds have beaten stocks over the last fifty years. I suggest you have a mix in your investment portfolio or, if you simply have stocks, you too can see another 45-50% of your "wealth" disappear. MF doesn't cover bonds, so there is rare;ly a mention.

  • Report this Comment On May 19, 2009, at 5:59 PM, Gardnermiles wrote:

    Madmilker: I sure hope everyone reads and absorbs your comments. You are telling it like it is and summing up why we are in this mess today. The only problem I see is that a reader will go to a store or dealership and still buy the foreign product. Too many persons are still buying foreign goods. It's the braindeads along with the government, big corp's and corrupt business practices that brought us down. We will not recover fully until a full scale janitor force cleans up the greed, corruption and moral decay that has overtaken America.

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