Yesterday, the Federal Reserve purchased $7.5 billion of debt in the form of Treasuries from the government, and plans to continue buying debt for a long time to finance the government’s spending. As the government continues selling this debt, the money supply increases. In total, the Treasury may add $3 to $4 trillion dollars to the economy.
This inflation will eventually lead to higher prices and the devaluation of the dollar. While inflation isn’t a worry when the economy is slow and consumers aren’t buying goods, it is likely that prices will start to rise when confidence in the market returns.
Currently, those high-yield savings accounts won’t do much to protect investors against rising prices. The banks will be slow to raise their interest rates when the economy returns. Investors may want to take a look at their portfolios to add a hedge against inflation.
Usually, gold is considered one of the best options and the best way to add gold to your portfolio is through an exchange-traded fund like SPDR Gold Shares. Even though the value of money was once based on gold, there’s nothing inherently stable about the price of gold. Gold doesn’t have intrinsic value — nothing has intrinsic value. Value is only assigned to something when people want it. And there’s no reason that people need gold.
Nevertheless, people turn to gold when they’re concerned about the value of paper money, so that makes it a good hedge against inflation.
Treasury Inflation Protected Securities (TIPS) are bonds tied to changes in the Consumer Price Index (CPI), the government’s measurement of the rise in prices. TIPS will decrease in value if we experience deflation, but you are guaranteed to get out at least what you invest. You can buy TIPS directly from the government via TreasuryDirect.
There’s a problem with TIPS, however. The CPI figure that drives the value of the bond may not reflect the real price increases experienced by consumers. It’s likely you will still lose the purchasing power of your money while it is invested in TIPS.
Another option for hedging inflation is investing in commodities, particularly oil. If you invest in oil through an ETF, like Energy Select Sector SPDR, you reduce your exposure to any one company and mitigate some risk. Oil is suggested for hedging against inflation while the economy is low because as the economy recovers, demand for energy will increase.
In all likelihood, this will be a yearly reminder. The US Postal Service is no longer required to go through a lengthy approval process to raise postage rates if the increase is below the “inflation rate.” That presents a good chance that each May, we will be required to pay about one cent more for sending a letter.
In May 2008, the rate for mailing a standard letter will increase from $0.41 to $0.42. The “forever stamps” purchased at $0.41 will still be valid, however. So if you’re crazy enough to stock up to “beat the price increase” and use inflation to your advantage, then start hoarding stamps now.
This won’t affect most of the people I know. E-mail has been the main form of communication for me for 18 years or so. USPS hasn’t yet announced the increase for Express Mail and Priority Mail, most likely my only use for the postal service.
Snail mail gets more expensive [CNN Money]
Right now, I’m listening to the album, Raising Sand
, by Robert Plant and Alison Krauss, released last year. Robert Plant will be 60 years old in August. I imagine he’s not thinking about retirement and we’ll continue to hear new music from him until he finally keels over. Unless you are one of the few who truly love the work they do, by age 55 chances are you’re planning the finer details of your retirement.
If you haven’t started saving money by 55, it’s going to be difficult to prepare for retirement by 65. According to Kiplinger’s calculations, in order to reach $1 million in ten years — and let’s not forget that a full retirement starting in 2018 is likely going to require much more than $1 million — it will take savings of almost $5,500 a month.
The more you have saved at 55, the easier it will be to reach millionaire status. A retirement nest egg of $50,000 reduces your monthly required savings to just under $5,000 for the next ten years. With $100,000 banked, you’ll need to devote only $4,253 each month, and with $200,000 you’ll need to put about $3,000 away.
The article has these suggestions for those 55 right now:
Take advantage of your peak earning years to top off your savings. Add an extra $5,000 in catch-up contributions to your 401(k) savings and an extra $1,000 to your IRA. As you near retirement, reallocate your portfolio to 70% stocks and 30% bonds. Estimate your retirement expenses and your projected income. If you’re coming up short, consider working a few more years.
I imagine most people aren’t going to want to hear that they’ll need to work longer in order to afford a comfortable retirement. If nothing else, young people should look at these figures and realize that it pays off to start thinking about retirement as soon as possible. It’s never too early.
The trick will always be balancing the needs and desires in the present with the potential needs and desires in the future. Saving for retirement implies that one will live long enough to reach a certain age — a goal that is not guaranteed. Saving as much as possible for retirement and delaying enjoyment of your life will be a waste if you die while doing so. Then again, if that happens, you won’t have the chance to dwell on your over-planning for long.
Realize that unless you plan on moving somewhere the cost of living is inexpensive, it’s going to take a heck of a lot of money to retire in a manner you’d like to be accustomed to. $1 million is a nice round number, but even the value of today’s $1 million wouldn’t get current retirees very far. Retire in the future, and $1 million is valued less, thanks to inflation. The younger you are, the higher you’ll need to set your goals.
Image credit: Pet Hawks
How to Make a Million at 55 [Kiplinger's Personal Finance]
If you’re 45 years old right now and working, perhaps you’re starting to consider when and how you’d like to retire. Kiplinger’s Personal Finance magazine has some suggestions if retiring with $1 million is art of that game plan. Keep in mind the role inflation plays; $1 million is a good goal, but twenty years from now, it might enough to fund an entire retirement unless you find a way to reduce your expenses. You have to start somewhere, however.
With no savings at 45, you’ll need to accumulate $1,698 in your portfolio every month to meet this goal. If you have $50,000 set aside for retirement, your monthly contribution will be only $1,298. With $100,000, a 45 year old can likely start retirement with $1 million by saving $861 per month.
Obviously, reaching this goal is more difficult the later you start. If anything, this series should be a wake-up call to those with half-a-century until retirement; unfortunately, that’s not the target audience of this particular magazine.
Here are the strategies Kiplinger’s Personal Finance suggests for 35 year old, a category in which I will find myself in just a few short years:
* Contribute up to $15,500 in a 401(k). Thinking back to when I was 25, I was earning under $30,000 at a non-profit organization in New Jersey. Even if a 401(k) had been available, maximizing my contribution to the IRS limit was practically unthinkable. For a 45 year old in the middle of a career, this strategy may be more attainable. At the very least, if your company offers an employer matching contribution, take advantage of that.
A full contribution to a 401(k) requires almost $1,300 per month.
* Adjust your asset allocation to 80% stocks, 20% bonds. For my preferences, I think even at age 45 there should be less emphasis on bonds. With a large amount of time before retirement, and particularly before the end of retirement, it would be worthwhile to keep a riskier portfolio weighted heavier in stocks. Not only do your funds have to last until retirement, they have to last through retirement. While I stock market downturn towards the end of your career could derail your investments, I probably wouldn’t do much to add bonds into a retirement portfolio until there are 10 years or less until retirement.
* Don’t put your kids’ college costs ahead of retirement. I’ve discovered that this is a mantra favored by most financial advisers. While you or your kids can take out loans to help fund their education, you can’t take out loans to fund your retirement. Does more need to be said? Maybe. If the choice is between helping a relative fund an education they wouldn’t be able to receive otherwise and my own personal retirement luxury, I may opt to assist with the education. This will always be a personal decision.
Every time I’ve presented this Kiplinger series so far, with suggestions for 25 year olds and 35 year olds, commenters have pointed out the devastating effects inflation has on funds. I’ve covered this many times. In fact, forget about the official core inflation data presented by the government. The price of the things you’ll need to spend money on as you grow older, such as health care for instance, are going to increase at a much higher rate than 3%. Forget about calculations that tell you the future value of $1,000,000 based on 3% inflation. But don’t stop saving for retirement.
No, if your time horizon for retirement is decades in the future like mine, $1 million will most likely not be enough to support my necessary expenses. Aim higher if you can, but you have to start somewhere.
Image credit: ohsoabnormal
How to Make a Million at 45
President Bush is suggesting a $145 billion rebate to taxpayers in order to stimulate the economy and avoid economic recession in 2008. About $100 billion is reserved for individual tax payers and the rest is for businesses.
This could come to the masses in the form of a $800 tax rebate check for each individual or $1,600 per household. However, a tax rebate may not be the best way to get money into the hands of who will spend it (and stimulate the economy as intended). Many who have a lower income and an inability to save thanks to (for whatever reason) paycheck-to-paycheck living conditions do not pay taxes, and would receive no rebate. If the government wants to get money into the hands of people who will spend and stimulate the economy rather than save, then it should somehow include these individuals.
If I receive a rebate check, I won’t stimulate the economy. I’ll put it in the bank and use it towards my 2007 tax bill. I’m sure most readers of Consumerism Commentary will do the same or pay off debt. A smaller portion will use the funds to buy something they’ve been eying or go on vacation, but not many. Get the “economic stimulus” to those who will stimulate the economy.
Here are some articles from around the web. [click to continue…]
If you perceived a painful sting each time you opened a wallet in a grocery store or at a gas station last year, it wasn’t just you. The Bureau of Labor Statistics has informed the public that the Consumer Price Index for 2007 is 4.1%, the highest inflation rate since 1990. The increase is due to higher costs of energy (up 17.4%) and food (up 4.9%). Without energy and food, the core inflation rate is 2.4%. [BLS: Consumer Price Index Summary]
When it comes to getting rich slowly, I’m generally a skeptic. The typical example prescribes investing $1,000 a month for thirty years into the stock market, earning 8% each year. At the end of thirty years in this example, you will find yourself with $1.5 million, but there are major assumptions that must be overcome:
1. Do you have $1,000 each month to invest? Many people live paycheck-to-paycheck. $1,000 may be 25% to 30% of your monthly pre-tax income.
2. Will you earn 8% each year in the stock market? It’s possible; over long periods of time, the stock market has provided this level of return, but it isn’t guaranteed. Taxes and fees eat into this return as well. Many professionals believe 8% is too aggressive an assumption; stock brokers will tell you it’s too conservative.
This also doesn’t address a major problem: inflation. If you accept the government’s measurement which declares that money loses purchasing power at a rate of about 3% each year, to find the “real value” of your future investment, reduce your assumed return percentage by that amount. Suddenly the $1.5 million 30 years from now looks more like today’s $836,000. That six figure amount is nothing to sneeze at, sure, but that in itself does not make someone “rich.”
Despite my thoughts about the fallacy of getting rich slowly, an enticing but ultimately disappointing endeavor, people make it work. Paul Navone from Vineland, New Jersey is an example. He worked in a mill for never more than $11 per hour, but he retired with millions. He doesn’t say how much he has to his name, but it was enough to become a significant philanthropist, giving away millions of dollars.
The day he turned 16, Navone left the eighth grade and applied for a factory job at Wheaton Glass in Millville. When he got his first paycheck two weeks later – Navone was earning 75 cents an hour – he thought he was a Rockefeller… At 21, he joined the Army and spent two years assigned to the base post office in West Germany. Back home, Navone moved in with an older sister until he had saved $6,500. With that stake, he bought his first property. He moved into one half and rented out the other…
“I lived on the income the one unit provided me, and I saved my wages from work,” Navone said. Not just saved, invested. He acquired a second rental property, then a third. Eventually, with the advice of stockbrokers, Navone expanded his investments.
So while Navone was working at is $11 per hour job at the mill, he was also earning money in property. That’s the key in this particular case, despite Navone’s penchant for cutting expenses. Even so, living frugally puts money in the bank and certainly contributes to a large bank account.
* He seldom watched television.
* He has never read a book. (What?!)
* The last girl he had a crush on contracted tuberculosis and died; he has avoided relationships since.
* He has no children. (Now this certainly contributes a lot to his bottom line!)
* All of his clothes come from thrift shops.
Navone’s mantra is, “I’ll work for the money, and then I want the money to work for me.” It sounds to me like he attributes his wealth to his investing prowess rather than his extreme frugality habits.
Donor built millions on $11 an hour [Philadelphia Inquirer]
Forget what the government tells you about the inflation rate, known to economists as the CPI. The CPI may come into play when dealing with economical issues, but don’t expect your real expenses to increase at a rate nearly as low as the rate quoted by officials. First of all, the CPI doesn’t include food or energy, two items that are sure to be a major expense in most households. As crazy as this sounds, it’s by design. Not only that, but the method of calculating the inflation rate has changed over time; if the old rules were still in effect now, the official rate would have been much higher these past few years.
Right now, the official rate of inflation is around 3%. Meanwhile, gasoline prices rose 8% and food prices rose faster than inflation this year.
Food and beverage prices are rising at a 4.4% annual rate. But dairy prices are up 13% (and 26% for a gallon of whole milk alone), thanks to price supports and brisk exports of powdered milk. Meanwhile, meat prices are up 6%, and bakery products are up 4.6% because corn is being converted into ethanol instead of animal feed, muffins and sweetener.
Food and energy are two major expenses for many households. College tuition and health care costs have outpaced inflation, as well. If you take a look at your year end totals in Quicken or Microsoft Money, you’ll likely see that your expenses have increased much more than the 3% or so quoted by the government. Calculate your own inflation rate and use that for making decisions about where to cut back.
The discrepancy between economists’ calculations and any individual’s reality is to be expected — the CPI doesn’t measure personal expense inflation, it’s more of just a marker to signify one aspect of the economy. For all practical purposes, it is meaningless. Are your investments providing you a better return than the CPI? That is probably considered a low benchmark for investment performance, as you want your money to grow to at least match your purchasing power from the previous year. Unfortunately, it’s highly unlikely that, assuming a 3% inflation rate, everything you could buy for $1,000 this year will cost $1,030 next year. Investments will have to surpass the inflation rate significantly in order to provide the same real purchasing power.
photo: Stewart
Your Real Cost of Living [Kiplinger]
Email this article
Print this article
