To many people inflation is just a number, a fact of life that we just have to live with. For the majority of last year inflation hovered around the 8% mark though it did briefly hit highs of 9%. This year inflation is currently around 6.5%. But let’s take a closer look at in order to see what it really means for your IRA or 401k.
Inflation figures are based on CPI, The Consumer Price Index. This measures the percentage change in the cost of a basket of goods and services [including retail, power, groceries, gasoline etc.] consumed by households over time. Using this information and averaging out the results based on a specific formula gives the inflation rate. The CPI is also sometimes seen as an indicator of how effective government economic policy is.
Averages can be a useful measure but they only so far as they give a general across the board picture. Digging deeper some things have gone up much more than the CPI would suggest. Grocery prices have gone up by almost 11%, a used car purchase by 24% and gasoline by a staggering 42%.
How is this Effecting your Retirement Savings?
Even just taking inflation at 6% per annum what that means in dollar terms is that every dollar you have saved over your lifetime in your retirement fund is now effectively worth losing 6 cents every year.
Inflation is constantly eroding your lifetime’s generated wealth every year not to mention diminishing the financial legacy you wish to leave to family and loved ones.
Inflation over the last 2 years has skyrocketed to over 6% and 2023 is showing no improvement so far. This is over 3 times the average of the last ten years which comes in at 1.88%. The last three years have effectively reduced the value of every dollar saved in your IRA by around 18%!
This ongoing scenario should be of huge concern for all Americans but even more so for retirees as they are no longer earning and consequently have no way of making up this ever increasing deficit in the value of their IRAs.
What is the Government doing to combat Inflation?
The major initiative to supposedly combat inflation is the recently introduced and controversial “Inflation Reduction Act” which became law in August last year and was hailed as a big win for President Joe Biden.
The aim of the bill is to reduce inflation by reducing the Federal Budget deficit, lowering prescription drug prices and investing in domestic clean energy production. However this will be achieved by massive spending of around 800 billion dollars. Ten percent of this budget will go towards a massive expansion of the IRS with a majority of that figure being spent on tax enforcement.
Many authority figures and organizations have grave doubts as to how effective this act is going to be on the inflation rate as it involves a huge increase in Government spending, funded naturally enough by taxpayers.
Both the Congressional Budget Office and the Penn Wharton Budget Model foresee that the bill will have no significant effects on the inflation rate. If this is the case, then there is no reason to expect improvement in the current inflation scenario, particularly with the Federal Reserve’s ongoing money printing excesses.
What can you do to combat the Erosion of your IRA/401K?
In inflationary times, which are starting to become very much the norm in the States, there are definitely actions you can take to reduce the impact of inflation on your retirement funds.
These are particularly relevant for those who are actually retired and living off their accumulated retirement funds as opposed to those who are still working and contributing.
Simple things such as curtailing luxury spending for example, put off that new car purchase or overseas vacation for a couple of years until inflation settles.
Drive less walk or cycle more, or even consider an electric vehicle. With the massive increases in the price of gasoline, this could be a very worthwhile saving.
Do a budget going back over at least 2 years to see you’re spending patterns, it can be very illuminating when you see in black and white exactly what you are spending on what. Most people very quickly see some areas where they can cut down and economize.
The weekly grocery shop can often be reduced by shopping more at farmers markets and taking advantage of all the coupon deals out there and doing a bit of comparison shopping. Growing your own produce can be a money saver too if you are green fingered.
Delaying claiming Social Security is another tactic well worth considering, as this will in actually “buy” more Social Security income. Once you actually hit retirement age, you can increase your benefits by 8% per annum for every year you hold off on claiming up until you reach 70. This is a significant improvement in the amount of inflation-protected income you will be entitled too.
In reality though these all of these things are pretty much a “band aid fix” designed to stop you taking as much money out of your retirement savings rather actually dealing with the root cause which is the long term erosion of those savings by inflation.
Switch to a “Safe Haven” asset base for your IRA or 401k
Safe haven assets are those which retain their value or go up in value in times of economic uncertainty. Top of the list of “safe haven assets” is a trusted old friend gold. Gold has always been top of the list for safe haven assets. Investing in gold is a great way to diversify your retirement portfolio, [as are other precious metals options too].
In fact respected investment strategy specialists Schroder’s goes one step further and describes gold in the following terms–
“We believe that gold is well on its way to becoming the “TINA” (there is no alternative) safe haven asset in coming years.”
It is now easier than ever to get involved in gold investment via instruments like the Gold Backed IRA account [See our separate post “An Understanding Gold IRAs” where we take a deep dive into exactly what a Gold IRA is and the exact mechanics involved in setting one up]
In a nutshell a Gold backed IRA account is a self-directed retirement account which enables you to purchase physical gold of a high purity [gold bullion bars or specific coins] which are then held in secure storage for you. IRS rules mean that you cannot store precious metals in other than approved custodial facilities.
More and more financially intelligent people are looking at alternative investment options like buying gold as an insurance policy against continuing inflation, money printing and inflationary Government policies.
