Investing for retirement is nothing more than a race, and your pursuer is inflation. If you stash your savings in anything that inflation can catch, you’ll only be wasting your money.
Inflation is the word people working at the Fed (with intelligent sounding titles, like “chairman”) use in place of the phrase “rising prices.” Inflation is the realization that as time goes on, things get more expensive. Hop in your time machine and go back 10 years. You’d find that gas was nearly a dollar per gallon, movie tickets were almost half what they currently are and property taxes were still outrageously high, but slightly less so than today.
(Of course, if you’ve recently thought about refinancing your home, you know that deflation is just as much a concern as inflation. But will save that for another time… :))
Why Do Savers Need to Worry About the Pace of Inflation?
Most people think savings is the opposite of spending, but this analogy isn’t really accurate. Savings is just delayed spending.
Think about savings and inflation this way. You golf every week for $22. Then one day decide that you’d rather quit golfing, save the weekly $22 for 30 years so that you can golf for 30 years after you retire. You are diligent and stash away the weekly $22 for the next 30 years, right up until retirement. The first day of being work-free, you grab your old golf clubs and head to the links. Surprise, a round now costs $65 to play. Grabbing a calculator, you realize that instead of trading 1,560 rounds of golf in the past for 1,560 rounds of golf in the future, you traded 1,560 rounds in the past for 528 future rounds.
Would anyone disagree that 1,560 rounds is better than playing 528 rounds? This is exactly how savers get burned when they invest in instruments that don’t keep pace with inflation. Unfortunately, there are a number of ways people invest that lose to inflation.