Unless you’re unfortunate enough to have received a life-shortening medical diagnosis, you will face higher-priced goods and services in your future, and certainly in retirement. So yes, your investments will need to not only keep pace with these inevitable price increases, yet ALSO will need to perform such that you can pay the taxes on these monies when you withdraw them.
Most of us are saving into 401(k)s, 403(b)s, 457 plans as well as Traditional, Roth and/or Simple IRAs so that we have money to spend in our retirement years. Yet if we’ve saved PRE-tax monies into these plans (Roths are only after-tax funded) we will owe Ordinary Income taxes on each dollar we withdraw, before we even get to the grocery store, or the movie theatre, or the adult community, or the hospital, where those dollars will be spent.
So, to reduce this concept called Inflation into terms we can all understand, the chart shows us that in 1913 one could buy a quart of milk for 9 cents. Fast forward to 1963 when one would only buy a small glass of milk for that same 9 cents, and then in 2015 that same 9 cents would only buy 7 Tablespoons of milk. Your imagination can supply you with all kinds of other examples–like expenses for larger ticket items, such as adult community homes, or hospitals or new cars, etc.
I paid twice as much for my new car in 1979 than my parents paid for their HOUSE! You heard me; it’s true. I remember nickel ice cream cones and 29 cent gas. What prices do you remember from your youth? It boggles the mind even more, realizing that with medical science enhancements, baby boomers may WELL live into our 90s if not past age 100! And price increases will continue to rise.
All this to say that while I cannot predict future earnings of any particular investment, or even class of investments, I like to remember Mark Twain’s quote, “History doesn’t repeat itself, but it does rhyme.” That said, stocks have handily outperformed both bonds and cash since 1926, such that one needs to apportion a certain percentage of their assets into stocks, which possess a potential for capital appreciation, all the while being subject to short-term price volatility.
I’ll detail in a future post about how to endure the angst of short-term price volatility; it can be done and you CAN invest successfully to keep drinking milk in retirement.