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Inflation can steal your nest egg – even if it’s pretty big

It’s old news by now that about 30 million Baby Boomers (BBs) will turn 60 within the next 10 years. Recent news reports, however, are outlining the retirement crisis that these BBs are facing.

My column today neither addresses the estimated 65 percent of BBs with insufficient assets who will face an average 25 percent reduction in their retirement income, nor that 5 percent of BBs who have enough wealth to not have to worry about their future.

Instead, I would like to discuss that 30 percent of BBs who accumulated some wealth for their retirement years and have, let’s say, a current net worth of between $1 million and $2.5 million. Specifically, I would like to address the serious challenges that this group faces in making the essentially irreversible decision to “retire” from their income-producing careers and businesses.

It may come as a shock, but based upon my professional experience, it would be quite difficult for a 60-year-old couple to retire, worry-free, with that wealth today.

The daunting hurdle that needs to be overcome is the erosion of purchasing power over a significantly extended life expectancy.

Quite simply, an inflation rate of more than 3 percent per year will decimate any fixed retirement income over a couple’s joint 30-plus-year life expectancy. Of course, the same inflation rate will gnaw on the capital that we count on to shore up our living standard. Even without doing the math, it’s easy to see why BBs are concerned about their golden years.

Although we will try to keep ahead of the inflationary drag on our income and capital, gaining the upper hand in this struggle will be a real challenge. Let’s take a look at a few of the main factors that will affect our retirement scenarios.

As bad as it may have been in the past, inflation will only get worse as the exploding cost of energy and food takes hold throughout our economy.

As I discussed in my last column, the impact of higher oil prices on our cost of living will be significant and permanent. Even if we started domestic oil drilling tomorrow and embarked on a fast-track nuclear energy program, the best we could hope for is the containment of future energy cost increases.

It’s fairly obvious that one of the best investments that this generation ever made was their home. Although it’s clear that home prices have declined from their previous highs, it is imperative that we make an educated guess about future real estate values for planning purposes. The good news is that we are, in my professional opinion, at the bottom of the real estate market decline. The bad news is that it is impossible to predict when this market will regain its upward momentum.

At this point in the cycle, it’s difficult to determine what the supply-demand imbalances in our real estate markets are. The problem is, and will be, the lenders’ unwillingness to make mortgage loans. Therefore, any BB who counted on selling his highly appreciated home in order to downsize or to finance his retirement lifestyle will be waiting for some time before that part of the plan becomes feasible again.

It should also be obvious that our economic growth is now severely constrained by the troubles in the real estate, financial and auto sectors. Unfortunately, with the continued increases in energy and food costs and the banks’ unwillingness to lend money for any purpose, it’s unlikely that our economy will move forward again any time soon. Since our stock markets are closely tied to our economy, it should be apparent that our financial markets will also have to wait for some time before resuming their upward momentum.

Even the wealthy BBs will face extraordinary challenges in planning for their retirement in the style that they have become accustomed to. They need to deal with unrelenting inflation that will eat up their fixed retirement incomes and capital. In addition, this group will have less support from appreciating real estate values and stock markets over the next five years than they may have counted on.

Considering the complexities that need to be dealt with in contemplating retirement scenarios, the best advice I can give is summed up in the roll call line from the 80s cop show “Hill Street Blues:”

Let’s be careful out there!

•••

Dieter Thurow, CPA, provides comprehensive wealth management services to affluent, local professionals. He is located in Healdsburg and welcomes your comments at dieter@dthurow.com.