Last updated on August 9, 2023
Inflation affects all of us.
But not many of us truly understand it.
You see, inflation is a sneaky beast. It creeps up on us gradually. And before we know it, our money doesn’t go as far as it used to.
But if inflation continues to rise, your savings may not be enough to support you in the way you’d hoped.
But don’t worry, understanding inflation and managing it properly is key to securing a comfortable retirement.
And that’s what we’re going to talk about today. I’ll:
- Cover the definition of inflation, what causes it, and how we can beat it
- Discuss why a million dollars isn’t what it used to be and how this affects your retirement
- Give tips and strategies to protect your savings from inflation’s grip
- Provide popular books and quotes on the subject
So, let’s get started. Because the more you understand inflation, the better equipped you’ll be to secure the retirement of your dreams.
What you'll learn:
⓵ Definition and causes of inflation
Inflation is the rate at which the general level of prices for goods and services is rising. And subsequently, purchasing power is falling.
Put simply, it means that as inflation rises, each dollar you own buys a smaller percentage of a good or service.
There are various factors that contribute to inflation, including (but not limited to):
- Increase in the cost of production: When the cost of raw materials and labor increases, it leads to an increase in the prices of goods and services
- Increase in demand: When there is an increase in demand for goods and services, it leads to an increase in prices as businesses try to capitalize on the increased demand
- Monetary policy: Central banks can cause inflation by increasing the money supply, which leads to an increase in spending and subsequently prices
- Government policies: Government policies such as taxes and subsidies can also affect inflation
❖ Common inflation indicators
The CPI measures the change in the price of a basket of goods and services consumed by households. And the PPI measures the change in the price of goods and services received by manufacturers.
Another measure of inflation is the Personal Consumption Expenditures (PCE) price index. Which is based on the prices of all goods and services consumed by households.
The Fed sets interest rates in order to control inflation. And if inflation is rising too quickly, the Fed may raise interest rates to slow it down.
In other words, if inflation is high, they (the Fed) want to stop you from spending your money. This can happen either by losing your job (so your income is lower). Or by not getting a raise (so you can’t keep up with higher expenses so you have to cut back). And so forth.
Conversely, if inflation is too low, the Fed may lower interest rates to encourage economic growth. Investors also pay close attention to inflation indicators because high inflation can erode the value of investments (more on this later on).
⓶ How to beat inflation
Inflation can be a tricky beast to tame. But with the right strategies and tactics, it’s possible to preserve your purchasing power and protect your retirement savings.
The key is to understand how inflation works and how it affects your finances.
❖ Invest in assets
One of the most effective ways to beat inflation is to invest in assets that have the potential to increase in value at a rate greater than inflation. This includes stocks, real estate, and certain types of bonds.
By investing in these types of assets, you can potentially outpace inflation and grow your wealth over time.
❖ Lower your expenses and increase your income
Another strategy for managing inflation is to focus on reducing expenses and increasing income.
Additionally, you can also consider downsizing your home or vehicle to reduce your living expenses.
❖ Increase your skills
Another way to beat inflation is to invest in yourself and your education. The more skills and knowledge you have, the more valuable you will be in the job market, and the more opportunities you will have to increase your income.
This is especially important as automation and technology continue to change the job market, making it more competitive for those with less education and skills.
❖ Save and stick to your budget
Another way to beat inflation is to save and budget wisely. Make sure to set aside a portion of your income each month for savings and investments. This can help you accumulate wealth over time and reduce the impact of inflation on your purchasing power.
❖ Stay informed
Finally, it’s important to stay informed and stay on top of inflation trends. Keep an eye on the Consumer Price Index (CPI) and the Producer Price Index (PPI) to get a sense of how inflation is affecting the economy.
Additionally, pay attention to interest rates and how they may be affected by inflation, as well as any potential changes in monetary policy by the Federal Reserve.
⓷ Inflation and the stock market
One way inflation can impact the stock market is by reducing the purchasing power of investors’ returns.
As prices for goods and services increase, the value of money decreases. This means that investors will need more money to buy the same amount of goods and services as they could previously.
This can make it more difficult for investors to maintain their standard of living. This can cause them to sell off stocks in order to have enough money to cover their expenses.
❖ Lower conviction
In addition, high inflation can also lead to decreased confidence in the stock market and the economy as a whole. When prices are rising rapidly, it can signal that the economy is not doing well and that there is a lack of stability.
This can cause investors to become more cautious and may lead them to take money out of the stock market in order to protect their investments.
❖ Rising interest rates
Another way inflation can impact the stock market is through interest rates. The Federal Reserve often raises interest rates (as already mentioned) in response to high inflation in order to slow down the economy and keep prices from rising too quickly.
However, this can make it more expensive for companies to borrow money, which can decrease their profits and make their stock less valuable. This can lead to a decrease in stock prices and can make it more difficult for investors to make a return on their investments.
It is important to note that while high inflation can have negative effects on the stock market, moderate inflation can actually be beneficial for the market.
Moderate inflation can signal that the economy is growing and that there are opportunities for businesses to increase their profits. This can lead to an increase in stock prices and can make it more likely for investors to see a return on their investments.
⓸ Inflation and real estate
Inflation can have a significant impact on the value of your assets, including real estate. As the cost of living increases, so do property prices, which can be both a blessing and a curse.
On one hand, the value of your property may increase. But on the other hand, your rental income may not keep up with inflation, making it difficult to maintain your standard of living.
However, there are ways to use real estate investing to protect yourself against inflation.
❖ Deflationary force
One of the most effective ways to protect yourself against inflation is to invest in rental properties. As the cost of living increases, so do rental prices. This can help you to maintain your standard of living and even increase your income over time.
Additionally, as property prices increase, so does the value of your investment. This can help you to build wealth over time and protect yourself against inflation.
Another way to protect yourself against inflation is to invest in land. Land is a finite resource, and as the population grows, the demand for land increases, pushing prices up. This can be a great way to protect yourself against inflation, as land prices tend to rise faster than the cost of living.
❖ Location matters
Finally, it’s important to consider the location of your real estate investment. Investing in areas that are experiencing economic growth and development can help to ensure that your property values increase over time. Additionally, investing in areas with a strong rental market can help to ensure that your rental income keeps up with inflation.
Overall, real estate investing can be a powerful tool for protecting yourself against inflation. By investing in rental properties, land, and in areas with strong economic growth, you can help to ensure that your wealth is protected and even grows over time.
⓹ Inflation and the value of money
One of the most insidious effects of inflation is how it erodes the value of money over time. When inflation is high, the purchasing power of your dollars decreases. Meaning that the same amount of money can buy less and less as time goes on.
❖ Is $1 million (still) a lot of money?
This is why, for example, $1 million was once considered a large sum of money. But now is no longer considered as such.
❖ Inflation steals your lifestyle
To understand the impact of inflation on the value of money, you need to understand what inflation does. Inflation steals your lifestyle. It sets you back in time. Inflation means that things got more expensive.
So you can’t keep doing the same things you were doing. Unless you increase your income (earned or passive).
❖ Inflation makes things difficult for businesses
When inflation is high, it can have a number of negative effects on the economy and on individuals.
For example, high inflation can make it difficult for businesses to plan and make investments. Since they don’t know what prices will be in the future.
It can also make it difficult for consumers to plan and make purchases too.
❖ Inflation is tax on your savings
One of the most significant ways that inflation affects individuals is by eroding the value of their savings. When inflation is high, the purchasing power of your savings decreases.
For example, if you have $10,000 in the bank and inflation is running at 2%, your purchasing power will decrease by $200 in a year.
Another impact of inflation is that it makes it more difficult to save for retirement. As prices rise, it becomes more expensive to save for the future.
For example, if you’re saving for a $500,000 retirement. And inflation is running at 2%, you’ll need to save $510,000 in a year to have the same purchasing power as $500,000 today.
To illustrate the impact of inflation, let’s look at another example.
Imagine you’re 25 years old and you’re saving $500 a month for retirement. If you’re able to save this amount every month for 42 years. Then you would have $1.39m by the time you’re 67 (use this calculator to play around).
However, if inflation is running at 3% per year, that $1.39m would only be worth $401k (and some change) in today’s dollars. Crazy, right?
⓺ Inflation and retirement
As we all know, retirement is a time when most people expect to live off their savings and investments.
However, inflation can have a significant impact on these savings and investments, making it harder for retirees to maintain their standard of living.
This can be a major problem for retirees who are living off fixed incomes and relying on their savings to cover expenses. As prices rise, their savings buy less and less, making it harder to make ends meet.
One of the biggest challenges of inflation for retirees is the erosion of purchasing power.
For example, let’s say you have $1m saved for retirement. In the year 2000, that amount would have been considered a large sum of money.
But today it might not be enough to maintain your standard of living. The cost of goods and services has risen so much that $1m today might not be enough to cover your expenses in retirement.
The only way to break inflation is to make sure you are growing your income (by investing in assets, starting a business, or working part-time during retirement) to offset the effects.
⓻ Inflation and the economy
Inflation can have a significant impact on the economy. When prices rise, the purchasing power of consumers decreases, leading to a decline in consumer spending.
This can lead to a decrease in economic growth, as consumer spending is a major driver of economic activity. Businesses may also be negatively impacted by inflation, as rising costs can lead to lower profits and reduced investment.
Government policies play a key role in managing inflation. Central banks, such as the Federal Reserve, use monetary policy to control inflation by adjusting interest rates.
Fiscal policy (such as government spending and taxation) can also be used to influence inflation. However, these policies can also have (un)intended consequences (like a recession or increased unemployment).
Inflation also affects different segments of society differently. Similar to the elderly (that we’ve already discussed above), low-income households are often disproportionately affected by inflation. Because they have a smaller margin for error. And are less able to absorb price increases.
⓼ Top 5 books on inflation
The General Theory of Employment, Interest, and Money” by John Maynard Keynes
This classic economics text, published in 1936, is considered one of the most influential works on macroeconomics of the 20th century. In it, Keynes argues that government intervention in the economy, including monetary policy, can help stabilize prices and reduce unemployment.
“Inflation: Causes and Effects” by Robert E. Hall and Charles L. Jones
This book, published in 2002, provides a comprehensive overview of inflation and its causes, including the role of monetary policy, productivity, and economic growth. The authors also discuss the effects of inflation on different segments of society and the various policy options available to combat it.
“The Inflationary Spiral: The Experience in China, 1939-50” by C.R. Hsiao
This book, published in 1962, provides a detailed account of the causes and effects of hyperinflation in China during the 1940s. The author argues that the root cause of the inflation was the Chinese government’s monetary policy, and that the experience has important lessons for other countries facing similar challenges.
“The Return of Inflation” by Jeremy Siegel
This book, published in 2018, provides an overview of the causes of inflation and its potential consequences in the 21st century. The author argues that the current low inflation rate is not sustainable, and that a return of inflation is likely in the near future. He also provides advice on how investors can prepare for and profit from a return of inflation.
“The End of Alchemy: Money, Banking and the Future of the Global Economy” by Mervyn King
This book, published in 2016, provides a comprehensive overview of the monetary system and its role in the global economy. The author argues that the current monetary system is flawed and that a new system is needed to prevent inflation and financial crises. He also provides a detailed plan for a new monetary system that would be more stable and sustainable.
⓽ Top 5 FAQ on inflation
❖ What is inflation and how does it affect my retirement savings?
Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. As inflation increases, the value of money decreases, which can erode the purchasing power of your retirement savings over time.
It’s important to factor in the potential impact of inflation on your retirement plan and consider options such as investing in inflation-protected securities or increasing your savings rate.
❖ How can I protect my retirement savings from inflation?
One way to protect your retirement savings from inflation is by investing in assets that have the potential to grow in value over time, such as stocks or real estate.
Additionally, you can also consider investing in inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), which are designed to maintain the purchasing power of your investment.
❖ Is it too late to start saving for retirement if I haven’t saved much in the past?
It’s never too late to start saving for retirement. Even if you haven’t saved much in the past, it’s important to start as soon as possible and to make the most of the time you have left.
Consider increasing your savings rate, working with a financial advisor, and creating a comprehensive financial plan to help you reach your retirement goals.
❖ How much should I be saving for retirement?
The amount you should be saving for retirement will vary based on your individual circumstances and goals. A general rule of thumb is to save at least 15% of your income for retirement.
But it’s important to consider factors such as your age, current savings, and desired retirement lifestyle when determining your savings goals.
❖ What are some common mistakes to avoid when saving for retirement?
Some common mistakes to avoid when saving for retirement include not saving enough, not starting early enough, not diversifying your investments, and not regularly reviewing and adjusting your retirement plan.
⓾ Best 6 quotes on inflation
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”— Sam Ewing
“Inflation is taxation without legislation.”— Milton Friedman
“Inflation is when you pay more for the same thing – deflation is the opposite.”— J. Paul Getty
“Inflation is when you can’t buy what you want with the money you’ve got.”— Unknown
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”— Ronald Reagan
“Inflation is good for borrowers and bad for lenders, and deflation is the reverse.”— Peter Thiel
Inflation is a silent killer. Make no mistake about it.
You can see the value of your hard-earned savings erode over time because of it. And hence making it harder to achieve your financial goals.
But by understanding inflation and taking steps to protect yourself, you can beat inflation and secure a comfortable retirement.
Whether it’s through investing in appreciating assets, growing your income, or reducing your expenses, there are many strategies you can use to mitigate the effects of inflation.
The key is to take action now and stay vigilant. So that you can enjoy the financial security and freedom you deserve.
And remember: the best time to plant a tree was 20 years ago. The next best time is today.