“By failing to adequately explain how inflation, compounded over time, significantly reduces spending power, we leave people vulnerable to the false assumption that the income they have today will still be adequate in 10 or 20 years. This is especially dangerous for people living on fixed incomes.”
Sarah Newcomb, behavioral economist at Morningstar, “Explaining inflation and compounding to your clients,” Investment News, June 7, 2021
As a behavioral economist, Dr. Sarah Newcomb uses her unique insights into psychology and finance to help people understand money in new and revealing ways.
She makes the point that consumers don’t always understand just how severely inflation can devastate their portfolio and purchasing power, and undermine their financial well-being.
So, what’s the best way to explain inflation to clients in a way they can best understand?
“Put as simply as possible, at 3% inflation, prices double every 25 years,” says Sarah. If your money doesn’t double over that time period, you’ve lost ground.
That’s why it’s so important for investors not to lose sight of their need for growth, even after retirement.
Don’t forget that for many people, retirement can last 25 years or more! It’s not uncommon for someone to retire in their early 60s. With today’s longer lifespans, many of those people are living into their 90s.
The Takeaway: We can help clients by preparing detailed retirement projections showing the impact of inflation on their portfolio and giving them options to make sure their money lasts as long as they do.