October 11, 2021
Despite a recovering economy and a bull market, many of you are worried…
And I don’t blame you. It takes years to build up a nest egg that will last you through retirement. But it can take just a few weeks to watch it get cut in half.
We’re in a market boom right now. That means a bust could be right around the corner. Plenty of folks have written to me recently asking how retirees should handle the coming “Melt Down.”
But surprisingly, that wasn’t their No. 1 concern…
When it comes to retirement, it turns out that folks are more worried about the looming threat of inflation.
Inflation reduces purchasing power. For retirees, your health care becomes more expensive… as well as your housing costs… and even your groceries. Simply put, a dollar won’t buy as much as it used to before a surge in inflation. And that means you run the risk of outliving your money.
It’s scary to think of. No one wants to be forced back to work when they should be on a beach sipping Mai Tais.
As an example of how inflation can crush retirees, take a couple with $1 million saved for retirement. They expect to spend $50,000 per year on expenses and trips to see their children and grandchildren. Let’s assume they earn 3% on their money in safe bonds.
Now, if there is 3% annual inflation, that $1 million would last for 20 years. But if inflation rose to, say, 12% per year… that $1 million would run out in 11 years and nine months. In this scenario, returning to work becomes a real possibility.
Now, 12% inflation is unlikely – but you get the point. Even an inflation rate of 4% or 5% can reduce the amount of time you can live on your nest egg.
Given the trillions in spending that our government has been pumping out lately, “inflation” is the latest buzzword. Flooding the economy with all that cash will definitely lead to more dollars chasing the same goods… and that means rising prices.
We track inflation each month in my income-focused newsletter Income Intelligence. To do this, we look at a number of inflation indicators – from commodity prices to real-world prices, like how much a bike costs at Walmart.
We’re showing that 14 of our indicators are flashing “inflation,” and that’s one of the highest readings we’ve ever had.
As of September, a few prices have started to cool – like those of gold, silver, and bread. But many are still soaring. Oil has nearly doubled on the year… corn is up 43%… and gasoline has risen nearly 50%. Most striking, though, is that unemployment continues to decline. That will eventually lead to wage pressures.
It’s obvious there’s still an underlying rise in inflation. So whether you like it or not, inflation is going to be an issue. Retirees should be concerned by it.
I experienced this myself recently, when inflation almost sent me biking across California wine country…
Last month, I turned up at Avis in Santa Rosa to rent a car for the weekend. I’m a regular customer there, so I’m familiar with the typical rental costs.
Of course, this year has been anything but typical. Normally, it would cost me $800 to rent a car for an entire month. This time, I was quoted $800 just for the weekend.
I ended up paying much less, thanks to my status as a longtime customer. But if I hadn’t been… well, lucky thing I can still ride a bicycle, because I wasn’t about to pay that price.
Then it was time to fly home. Two years ago, a business-class flight from California back to the East Coast would have cost me anywhere from $500 to $600. But it’s different now. These prices were just around $2,000. I even saw one for $3,200. It’s insane.
Once again, I was fortunate… I was able to push my flight to another day and pay a lot less. But some people have no choice but to pay these absurd prices.
This isn’t just a story of wacky things I saw on my vacation. Prices are rising everywhere…
Home prices are up 17% over the past year. Used-car prices have increased 32%. And as we said, gas prices are up roughly 50%.
You’ve seen headlines about these increases, I know. But take another look at the table… Did you know the price of electricity is 5% higher than it was a year ago? And have you heard that a gallon of milk costs nearly 5% more than it did last year?
These are real price increases that affect real people… And they will hit you especially hard if you are retired and living on a fixed income.
Take a look at the chart below of the Core Consumer Price Index (“CPI”). Core CPI takes out volatile food and energy prices. You can see the dramatic spike in inflation…
Some folks are terrified of these rising prices… They think we’re on the brink of 1970s-style inflation – a significant, long-term problem that will severely devalue Americans’ savings.
Others, including Fed Chair Jerome Powell, see today’s inflation as “transitory.” In other words, it’s a temporary price recovery from a wonky 2020.
But whichever camp you fall into, one thing is clear…
And while the Fed has made noises about raising rates down the road, it still isn’t in a hurry to cool it. That means we could be looking at higher prices for the foreseeable future.
And folks increasingly believe this inflation could be significant. Take a look at the New York Fed’s national consumer survey. While people do expect unusually sharp inflation this year, they’re also expecting a higher rate over the next three years…
So what should investors do in today’s environment?
When inflation strikes, you want to own hard assets like gold or real estate. Some stocks can also do well during inflation…
A good business can raise prices to offset inflation. If you have highly demanded products and happy customers, you can charge a bit more to cover rising costs like wages or raw materials.
Most stocks like this are considered value stocks. A value stock typically makes a lot of money today relative to its market value. These kinds of companies don’t have expectations of high double-digit revenue growth in the future, and that’s often why they’re priced cheaply.
Growth stocks, on the other hand, are priced expensively relative to what they earn today. That’s because the market expects them to earn a lot more money in the future.
When inflation strikes, a growth stock’s future revenue isn’t so valuable anymore… That’s the entire point of inflation: $1 in 10 years looks a lot less attractive than $1 today.
So with the inflation we’re seeing today, look for quality businesses that can raise prices… and be wary of stocks counting on future growth.
P.S.: We are living in a very dangerous financial time… And the biggest risk right now is doing nothing. Don’t get stuck in the “Denial and Procrastination” phase. Don’t rely on the government to save you.
If you care at all about your financial future, I have critical information you need to hear today.
You know, I started on Wall Street nearly 40 years ago. And I’ve traded through Black Monday in ’87… and the savings and loan crisis that followed… the Asian debt crisis in ’97… the dot-com bubble in 2001… and the Great Recession in ’09.
And today, we are on a dangerous path in America. Our government has put us all on a terrible road to currency devaluation and a new era of inflation.
That’s why I’m offering my retirement advisories for such a discount right now. Today, you can try our work totally risk free, and at a huge discount to the normal price. Don’t wait… Click here to find out the details.
Love us? Hate us? Let us know at [email protected].
Dr. David Eifrig
Contributor, American Consequences
With Editorial Staff
October 11, 2021