Inflation
In the very beginning of this book, I argued that inflation is a primary reason that we must invest as opposed to sticking our money under the mattress or in a poorly performing savings account at the local bank. These options are terrible because the tendency of money is to decrease in value (buying power) over time. Economists will point out that various inflation related phenomena mean that we are not always in an “inflationary” market. There are periods of inflation, periods of deflation, and strange hybrids that consider other economic factors such as “stagflation.”
When it comes to retirement, we often hear about living on a “fixed income.” At first glance, that sounds good. If it is fixed, then it should be dependable. It can’t go down, right? The thing to understand about fixed income is that the numbers may not go down, but the buying power of those dollars most certainly will. Even social security gives you a COLA on a regular basis to combat these ill effects on your standard of living. Your bond investments and poor-performing annuity investments will not do so. When you are investing your own money, you have to plan in a hedge for inflation. The simplest and most effective plan is to earn a rate higher than the inflation rate such that you reach your financial goals despite inflation.