Five Step Inflation Survival Guide

How Inflation Erodes Purchasing Power

While moderate inflation is economically healthy, higher inflation may foreshadow a more dramatic decline in future purchasing power. Businesses and consumers often spend more and demand more during good times which permits producers to raise their prices. If an economy grows too rapidly, prices can increase too quickly – creating an upward, inflationary price spiral.

Investors typically aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. For example, let’s say the economic environment is characterized by a 3% rate of inflation, as measured by the Consumer Price Index (CPI). An investment earning 2% will actually produce a negative return (-1%) once earnings are adjusted for inflation.

Over the course of 25 years, an inflation rate of 4% would reduce the purchasing power of $1000 to only $368. It’s important to understand that if your money isn’t growing at a rate at least equal to the rate of inflation, you’re losing purchasing power.

Fighting Inflation

Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates to government spending, tax policies, and Federal Reserve forward-looking statements.

The chart below presents a dramatic illustration of how quickly inflation can erode purchasing power over time. It’s important to understand that if your money isn’t growing at a rate at least equal to the rate of inflation, you’re losing purchasing power.

If you stash $1,000 in a box and leave it there for 25 years, assuming an inflation rate of 4%, when you take the money out, your original $1,000 would only be able to purchase $368 worth of goods! Source: Handson Banking

Buying Less With More

Inflation chips away at real savings and investment returns, which must first keep up with the rate of inflation in order to increase real purchasing power. After adjusting for inflation, some of the differences in prices are eye-opening. Since many of us will live to be at least 75 years old,1 it is helpful to take a look back and compare yesterday’s prices – in 1975– to what we could buy in 2015 (latest comparisons available). After adjusting for inflation, some of the differences in prices are eye-opening. In 1975, a new house on average cost $48,000. Today, adjusted for inflation, the price is $270,200. You could buy a gallon of gas for 59 cents in 1975. The average price of gas in 2015 was $2.38.

Source: Bureau of Labor Statistics,

Inflation’s Oversize Impact on Those Over 62

Future retirees received their own inflation rate designation in 1987. That was the year Congress directed the Bureau of Labor Statistics to begin calculating a Consumer Price Index for those 62 and up. The result was “CPI-E.”

CPI-E now regularly tracks the impact of inflation on a range of consumer categories. The table below dramatically shows the inflation-weighted impact on spending categories that compare those 62 and up (CPI-E) with urban consumers (conventional CPI) and urban wage earners (CPI-W). Due to inflation’s impact, older Americans spend substantially more on health care than others and somewhat more on housing — two of the most critical spending areas for our aging population.

Source: CPI-E is an experimental index from BLS that is based on individuals at age 62 and older. Headline CPI is also referred to as CPI-U, including food and energy as of December 31, 2016. For illustrative purposes only. J.P. Morgan Asset Management Guide to Retirement 2017, p. 10

Five-Step Inflation Survival Kit

Focus On What You Can Control

First, focus on what you know and can control today. We can’t control what happens to interest rates or market events. We certainly can’t control the prices of securities. On the other hand, there are ways to help off-set inflation risk that you can control. For example, you can educate yourself on how to allocate assets to build in less sensitivity to inflation-driven interest rate swings. You can also reach out to a Tradewell Tax & Financial investment advisor representative on strategies to best off-set and  lower your inflation exposure.

Plan for a Longer Retirement

Every day for the next 19 years, 10,000 baby boomers will reach age 65.3 This rise is anticipated through 2050, when the numbers of those aged 65 and over will soar past 80 million, followed by a dramatic drop in the ratio of individuals from 20 to 64 versus those 65 and up; from 4 to 1 in 2015 to 2.6 to 1 by 2050.4

Thanks to healthier lifestyles and breakthroughs in medical technology, life expectancy for Americans has increased significantly during the past half-century. While it’s good news that you can expect to live longer and have a better quality of life, it also means your investment portfolio may need to last for 30 years or more.

For example, here’s the likelihood of 65-year-olds living to certain ages, according to figures from the Society of Actuaries:5

  • Male. A 65-year-old man has a 41% chance of living to age 85 and a 20% chance of living to age 90.
  • Female. A 65-year-old woman has a 53% chance of living to age 85 and a 32% chance of living to age 90.
  • Couple. If the man and woman are married, the chance that at least one of them will live to any given age is increased. There’s a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90. There’s even an 18% chance that one of them will live to age 95.

Consider Potential “Inflation-Offset” Investments

Some investments have more sensitivity to the rising cost of living than others. Traditional bonds, for example, can lose some of their underlying principal in rising rate environments. On the other hand, inflation-linked bonds are explicitly tied to changes in inflation. In 1997, the U.S. introduced Treasury Inflation-Protected Securities (TIPS). TIPS help protect investors from inflation because both their principal and their interest payments adjust as the prime metric for inflation, the Consumer Price Index (CPI) changes.

Common stocks may be a good investment relative to inflation over the very long term, because companies can raise prices for their products when their costs increase in an inflationary environment. However, over shorter time periods, stocks have often shown a negative correlation to inflation and can be hurt by unexpected inflation. When inflation rises suddenly or unexpectedly, it can heighten uncertainty about the economy, leading to lower earnings forecasts for companies and lower equity prices, too.

How do you see inflation affecting your retirement spending plans?

The accompanying chart dramatically illustrates how quickly inflation can erode buying power over time. Over the course of 25 years, an inflation rate of 4% for example, would require an investment to grow from $50,000 to $133,292 to maintain the same level of purchasing strength.

Imagine how inflation might affect the buying power of your money. One potential inflation-resistant retirement income idea might be to include guaranteed income from fixed annuities that provide growth potential as well.

Take Action Now – And Consider Professional Advice

The sooner you redirect a few dollars more to your investment and savings plans, the more money you may have to grow over time. The effect of compounding your investment earnings can be quite dramatic. In fact, Albert Einstein called the effect of compounding interest “the greatest mathematical discovery of all time.”  your either receiving it, or paying it.

That’s because compounding may help you outpace inflation by earning money not only on your savings, but also on any income dividends or capital gains that your portfolio accumulates. The sooner you take action: to control what you can, plan for a longer retirement and diversify your portfolio with investments that have the potential to off-set inflation, the better off you could be.

You don’t have to go through this experience alone, either. Consider hiring a qualified professional investment advisor from Tradewell Tax & Financial to help get you to, and through retirement in the most  sucessful way possible.

Let experience be your guide

If you are saving for retirement, but not taking advantage of tax-deferred investing, it could have a dramatic impact on your future. Consider consulting with an experienced representative today on how tax deferral can positively affect the growth of your retirement assets.

About Mike Albertson

The Founder and CEO of Tradewell Tax & Financial, Mike is also a fee-based Investment Advisor Representative and Fiduciary who is required to put his clients’ interests before his own. In 2002 Mike entered into the financial services sector as a way to learn about people and help them.

Since those early days his practice has grown into one of the Fort Wayne region’s best investment management firms.  Applying his unique quarterbacking approach to traditional planning and investment management, Mike supervises a full-time team of attorneys, Enrolled Agent, tax advisors, and insurance professionals.

Article Footnotes

  1. Society of Actuaries Retirement Participant 2000 Table
  2. Bureau of Labor Statistics, MyBudget360
  3. Pew Research, December 29, 2010
  4. Population of Americans Aged 65 and over, in millions. (NP-T4) Projections of the Total Resident Population by Age Groups. Health Service Research
  5. Calculations are based on mortality data from the Society of Actuaries Retirement Participant 2000 Table


Mike Albertson is an Investment Adviser Representative. Advisory services offered through Secure Asset Management, LLC (SAM) a Registered Investment Adviser.

Wes Phelps is an Investment Adviser Representative. Advisory services offered through Secure Asset Management, LLC (SAM) a Registered Investment Adviser.

Tradewell Tax and Financial is not affiliated with Secure Asset Management

Representatives of Tradewell Tax and Financial are authorized in states where they are properly registered. Mike Albertson: AZ, FL, IN, KS, KY, ME, MI, MN, NC, OH, SC, TX. Clients who are not residents of these states cannot be serviced.

This website is not intended to provide investment, legal, or tax advice, nor to effect securities transactions or to render personal advice for compensation. Tradewell Tax & Financial is not engaged in the practice of law.

All insurance recommendations will be provided by a state licensed Tradewell Tax & Financial insurance agent.

There are no assurances that you will achieve your investment objectives. All investment strategies have the potential for profit or loss. Changes in investment strategies, economic conditions, contributions, or withdrawals may materially alter the performance of your portfolio. Past performance is no guarantee of future success. We provide no guarantee that any portfolio will match or outperform any benchmark.

Recommendations and advice are based on information provided by the client that is presumed to be accurate. The financial planning process is not stagnant and must be adjusted based upon changes in the client's personal and financial situation, liquidity needs, investment objectives, and risk tolerance. Clients are responsible for notifying us immediately if their personal and financial circumstances or goals change.