Inflation Wants to Eat Your Savings, but You Can Beat It Back

It's a strange thing, inflation. You will seldom hear it talked about as much as market downturns or risks. Much of this is due to the fact that the market can lose large amounts quickly, in a glaringly visible way. Inflation, on the other hand, is not so dramatic. However, it can cause you to lose equal amounts of your portfolio — or more — but slowly, almost silently, over time. We may not even realize it’s happening.

While inflation has averaged 2.1% over the past 20 years, this year's expected rate of 4.4% shows that we can't expect inflation to be dormant forever. So, let's see what would happen to your money if inflation averaged 3.5% for 20 years, for illustrative purposes. Say you have $100,000 in the bank, earning little to no interest. With an inflationary rate of 3.5% that $100,000 will be worth just $50,000 in 20 years. It took 20 years for that money to deflate, so to speak. That is two decades where we may have not fully appreciated that our money was shrinking.

Many of us do not like risk and are frightened by the downturns in the markets. So we place our money in the bank and wait, and wait, and wait. Since the financial crisis in 2008, well over 10 years — or half of that 20-year inflationary period mentioned above — has already passed. With its passing, our money has slowly lost purchasing power. It just doesn’t buy as much as it used to.

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When the Fed speaks of low or no inflation, while it may be true for the economy overall, it might not feel that way to the average consumer — especially we who have growing children in our homes. When my wife and I feed a family of five, and three good eaters, and I pass through the checkout line at Trader Joe’s, no one can tell me prices have stayed the same. My grocery bills are much higher than just a few years ago for a certainty! When I swipe that credit card, it rings out loudly. I so often am amazed how quickly I can break the $100 barrier at the grocery store, when I’ve gone in for just a few items. Aren’t you?

Don’t Ignore Inflation: Deal with It

Inflation is there, it’s strong, and it’s an enemy. It’s slow, yet deliberate, and it eats away at our money. Its presence must be addressed and dealt with. Especially if large amounts of a person’s savings are in the bank earning 0.5% or less. It is insulting to our money and dangerous to our savings. We recognize that everyone needs to have some emergency money at the bank or in savings, say six months gross wages. But to have large amounts of our TSP in the G Fund or 401(k) and IRAs sitting in a money market can be potentially dangerous to our retirement. Big CD balances or massive savings accounts may just not be serving you well.

For many the conversation can be uncomfortable. The bank never seems to lose their money and they always know how much money they have. This for some feels like safety. But that silent nemesis of our savings, inflation, is shrinking our money. A person should not be penalized for saving their money at the bank. But arguably since the financial crisis, and subsequent suppression of interest rates from the Federal Reserve yet once again due to Covid, it sure feels like a penalty. The financial crisis brought interest rates to the bottom years ago, and interest rates are still historically low, low, low. When folks can refinance their home for 3% for a 30-year mortgage, you know interest is lean. So many have jumped on board and refinanced, and for good reason, can anyone blame them?

Even the TSP, the federal 401(k) plan, recognizes this problem of inflation. The G Fund’s stated objective is to keep pace with inflation. It is invested in short-term U.S. Treasury securities. Yet the most conservative of the TSP’s Lifecycle Funds — the L Income Fund — still has 23% of its balance in stocks. A colleague of mine pointed out that the L Income fund has actually been increasing its exposure to stocks starting in 2019 and continuing. In 2018 and all years prior, there was just 20% of the L Income balance in stock funds, the C S & I funds. In fact, this target lifecycle fund will continue to increase to 24% stock funds and 6% bond F fund over the course of a decade, slow but sure. The fund’s managers are actually increasing risk, steady as she goes. By selecting the L Income Fund, the statement is made that you are terribly conservative, desiring income from your savings. Yet the Thrift Board still recognizes you must have some stock funds exposure, otherwise your money will shrink. There must be some method of growth present, and they want to increase that exposure, and are so doing.

Get Your Money Back to Work

Your money in the bank could be likened to a grown child. They’re 18, sitting on the couch not contributing to the household chores, watching TV and playing video games, while their laundry and dirty dishes pile up. "Get up! Get to work!" you holler out. Put your money to work. Get it going. Get it up off the couch.

Stop penalizing yourself with inflation. If you want to stop the shrinking in your retirement accounts, then you’d need to consider an overall wealth strategy that includes stock funds or ETFs, and at the TSP that includes at least the C Fund and S Fund. For large amounts in savings, there may be low-risk alternatives out there. And their goal should simply be to pace inflation. Albeit, you may give up a majority of liquidity, but you may get growth that could pace or even outpace inflation. They may even be more tax advantaged than that CD that churns off little interest and, to add insult to injury, a 1099 interest income issued at the end of the year.

I would suggest finding an adviser who is both a retirement planner and a fiduciary. Do your due diligence, and then formulate a plan, have it in writing, and stick to “the plan.”