This week, I’m talking about why inflation matters in retirement. 

Yesterday, I talked about how you need to make a 7% return on your investment portfolio just to break even with a 15% tax rate, 3% inflation, and a 4% withdrawal rate. 

Today, I want to take a closer look at that 7% return and how to avoid the mistake that too many people make in retirement. 

Knowing that a 7% return is a good target in retirement to help you keep pace with inflation, taxes, and portfolio withdrawals, let’s look at what your investment portfolio should look like to help you get there. 

A good place to start is to look at what won’t get you there. If you think your money is safe under the mattress, buried in the backyard, or sitting in your bank account, think again. It may be safe as far as it won’t lose any nominal value, but that’s as safe as it goes. If your money isn’t earning at least enough to keep up with taxes and inflation, you are LOSING money in real terms. 

Translated to real dollars, if you’re in the 15% tax bracket, your money needs to be making a 2% rate of return in today’s very low inflation rate environment just to break even. In other words, if you’re not making at least 2% on your money right now, you’re losing money. 

Because interest rates are so low right now, bonds and CDs are also struggling to keep pace. That doesn’t mean that you shouldn’t own bonds - they certainly have their place in a retirement portfolio, but the error many retirees make is having too much in bonds. 

The key is to invest in a portfolio that is capable of earning 7-8% a year, which means that stocks have to be part of that equation, and that’s even more true right now when it’s challenging to earn meaningful returns in cash, CDs and bonds in this current environment. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.

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