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In this video, Chris discusses the importance of maintaining purchasing power over the long term, especially when planning for retirement. He illustrates the erosion of purchasing power by using examples of how inflation affects the value of money over time.
Chris demonstrates that with a 3% inflation rate, $100,000 today would be worth only $47,000 in 25 years, and with a 5% inflation rate, it would be worth even less, at $29,530. He also shows how products or services that cost $100,000 today could cost significantly more in the future due to inflation.
To combat the impact of inflation, Chris emphasizes the need for investments that not only keep pace with inflation but exceed it. He presents a chart comparing the rate of return before and after inflation for various investment vehicles, highlighting that historically, equities have consistently outperformed inflation.
The video underscores the importance of choosing investments that have the potential to maintain and grow your purchasing power, especially in the face of rising inflation. Chris encourages viewers to reach out if they have any questions or need further information.
Hi, everyone. Chris here with EWA making a short video on purchasing power and why it’s important to maintain purchasing power over the long term, for example, when we’re planning for retirement. So what we have on the screen here is an example of erosion of purchasing power.
So if you have a hundred thousand dollars today and we assume 3% for inflation, which is the orange bar, in 25 years, that $100,000 is only worth $47,000. If we assume 5%, that $100,000 is only worth 29,530 in 25 years.
The right side takes a look at increases in pricing. So something that costs $100,000 today, if we assume 3% for inflation, that same product is now $209,000. And if we assume 5% for inflation, that $100,000 product now costs $338,000.
So very important that we are not putting too much money in safe assets that do not earn a rate of return that is high enough to not only pace inflation, but exceed inflation. So this next chart shows what’s your rate of return before inflation, and then what’s your rate of return adjusted for inflation?
So on the left, we have stocks. Second, we have a 60% equity, 40% fixed income portfolio. Next we have bonds, then we have CDs, and then we have cash. So obviously, the best vehicle to not only maintain purchasing power but exceed inflation is equities.
And that’s how we maintain purchasing power. We favor equities because if we look, if you just invest in bonds, for example, it’s a very safe, steady ride. You’re not going to see a lot of downside, but you’re also not going to see upside.
Before inflation. If we’re looking at just bonds, your rate of return is 3.84%. But if we adjust this for inflation, your rate of return is really only 0.8%. Oftentimes we see clients will over accumulate in vehicles like bank CDs or just cash.
Oftentimes you’re not even maintaining your purchasing power with these products. So if we look at CDs, it adjusted for inflation and again the status from 2011 to 2020 after adjusting for inflation, CDs wouldn’t even have maintained your purchasing power, you would have lost 1.7%.
So we just wanted to make this video. Hopefully it’s helpful because we feel that inflation has been a very hot topic so far this year. The hedge to this is Favor Bring Equities as historically the equities have always outperformed inflation.
If you have any questions on this, please feel free to reach out. I’m happy to discuss in more detail.
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