How to Preserve Purchasing Power for Your Retirement Savings

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(June 2012)

Conclusion

Most people are inadequately prepared for retirement. If you intend to retire above the poverty level, you almost certainly will need more income than Social Security will provide. Hence, you need additional funds that you can invest where they will grow and also preserve purchasing power.

It is wise to expect continued massive increases in government debt and currency supply, a declining dollar, a much higher cost of living, and reduced purchasing power. Most investments will not keep pace with your loss of purchasing power, so you will benefit from thinking outside the standard Wall Street model, declaring your personal financial independence, and making alternate choices.

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The P.P.P.P.P. Approach (Proper Planning Preserves Purchasing Power) acknowledges the current economic conditions, sovereign debt trauma, and the inflationary currency creation of the Central Banks. This approach attempts to increase the purchasing power of your retirement funds, instead of hoping for a few percent of nominal return while watching much larger price increases on everything you need to live.

Into Which Category Do You Fit?

  • You know you need more retirement funds than you have currently saved, but can’t find any way to increase your savings, while your time until retirement is "running out."See What to Do?.
  • You have 401(k) retirement funds at your place of employment, and they are down 5% to 40% in the past four years. What do you do? See What to Do?.
  • You have a self-directed IRA with money sitting in a money market and various losing stock positions, and you don’t know whether to wait and hope or make a change. Further, even if you decide to make a change, you don’t know into what to invest. See What to Do?.
  • You have a Financial Planner, and he/she has managed your account to a net loss or a minimal gain over the past four years, while the actual purchasing power of your retirement account keeps shrinking. Do you continue with your current Financial Planner or make a change? See What to Do?.
  • You have no retirement savings from your employment, no other savings, too much credit card debt, and little trust that Social Security will provide for your retirement needs. You know you will be unable to work much longer. I won’t be much help, but I encourage you to read further.
  • You have no retirement and no expectation that you will ever retire. In effect you expect to "work until you die." I will not be able to help you. Take care of your health.
  • You have several million dollars in your retirement accounts, excellent annual income, and your investments are returning 10 to 20% per year. Your primary concern is not income, but your golf game. Read no further, and proceed to your local pro shop to get a golf lesson.

What to Do?

I believe that over 90% of Americans will fall into one of these seven categories while the other 10% have substantial income and/or such a large asset base that they have little financial risk with their retirement. Those people do not need this discussion.

Let’s start with these assumptions:

  • Social Security is currently paying out benefits and will continue to do so. But, if benefits are flat or only slowly increase while your cost of living increases by 10% or more per year, your purchasing power will decline by about half in eight years. If inflation gets worse, Social Security purchasing power will decrease even more rapidly. This may be inconvenient in three years, but it will feel like a disaster in 10 years.
  • Most people don’t have a plan for their retirement, don’t know WHAT to invest in, or WHEN to invest.
  • The typical Wall Street approach is to "buy and hold" a balance of stocks, bonds and corporate debt. Since the stock market, on average, has made little to no progress in a decade and since corporate debt, certificates of deposit, savings accounts, and money markets currently yield next to nothing, it seems likely that your traditional retirement accounts are not performing well. Even the best professionally managed investment accounts have had minimal returns over the past five years. The 2008 crash hurt almost everyone. In seems likely, to many others and myself, that another crash is coming soon – we just do not know when.
  • People are reluctant to invest in something they don’t understand. This is sensible.
  • Fear trumps greed, and emotions usually trump rational thought. This is basic human nature.
  • On average, most people are more afraid of investment losses than they are intent upon investment profit. Fear of loss overwhelms desire for profit. This is normal.
  • The consequences of minimal Social Security payments, increasing cost of living, the standard Wall Street approach to investing, and our natural human fears and emotions are that most people are inadequately prepared for retirement. IT WILL GET WORSE!

Further!

  • Realize that Social Security will not be adequate for almost everyone, and you must accumulate retirement savings on your own.
  • Realize that the "buy and hold" investment approach for stocks, bonds, and certificates of deposit with minimal yield is unlikely to provide enough for your retirement.
  • Realize that, in the currently unstable economic environment, our natural human emotional responses to fear, greed, and risk avoidance are likely to work against our retirement plans and goals. Amateur investors often buy at the top price and sell near the bottom price and become discouraged by the resulting losses. Professional investors make huge profits by taking advantage of our human emotional responses.
  • Unless you are unusual and have been highly successful in your retirement accounts, you probably need to break out of the traditional patterns and follow a different plan. What?

In my opinion, the new plan must look something like the following:

  • Earn more, save more, and spend less. I know it is easy to say and difficult to do, but it can and must be done. Then intelligently place savings in various investments that will grow and preserve your purchasing power. The critical factors are WHAT and WHEN.
  • Move some or most of your self-directed IRA into investments that preserve purchasing power.
  • Move 401(k) funds into other investments and mutual funds that will preserve purchasing power. If your 401(k) investment options are heavily restricted and you are stuck in traditional investment choices, try to get your plan options changed to include gold and silver mutual funds. Or, consider obtaining a loan or rollover from your 401(k) and personally invest the funds in various gold- and silver-related investments.
  • If your Financial Advisor has not done well for you, encourage your Financial Advisor to aggressively focus on gold and silver inflation hedges. Otherwise, withdraw half or more of your funds, and invest them yourself in various gold- and silver-related investments.

Conclusion

Most people are inadequately prepared for retirement. If you intend to retire above the poverty level, you almost certainly will need more income than Social Security will provide. Hence, you need additional funds that you can invest where they will grow and also preserve purchasing power.

It is wise to expect continued massive increases in government debt and currency supply, a declining dollar, a much higher cost of living, and reduced purchasing power. Most investments will not keep pace with your loss of purchasing power, so you will benefit from thinking outside the standard Wall Street model, declaring your personal financial independence, and making alternate choices.

Those choices are described in the Maintain Your Purchasing Power – How and Where Should You Invest article.

The P.P.P.P.P. Approach (Proper Planning Preserves Purchasing Power) acknowledges the current economic conditions, sovereign debt trauma, and the inflationary currency creation of the Central Banks. This approach attempts to increase the purchasing power of your retirement funds, instead of hoping for a few percent of nominal return while watching much larger price increases on everything you need to live.

I wish you prosperous investing and hope that you will take control of your financial future.

GE Christenson
aka Deviant Investor

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One thought on “How to Preserve Purchasing Power for Your Retirement Savings

  1. Well, you didn’t mention those of us who have a corporate pension…those of us who are “lucky” and have another fixed income besides social security. We can’t take money out of that fund and reinvest it. Maybe we should just plan to work longer (a lot?) than we had hoped.

    Over all, this was useful. I should work longer and do some wise investing with whatever extra I earn!


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