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The power of inflation: Time is not on your side!

The other day I received an invitation to attend a class reunion banquet from my old high school in Upstate New York, Union Academy - Bellville. This year the classes of 1964 and 1989 are being honored for their 50th and 25th anniversary years, respectively. While I know quite a few of the folks from the 50th year class, it was interesting to see some of their children graduated in the 25th anniversary class.  The invitation was very well thought out, and included perspectives not only on economics, but other facets of our lives back in the days of high school. 

In this invitation, a powerful rule that is sometimes forgotten related to investing and cost-of-living was brought to mind. The Rule of 72 states that if you divide 72 by any growth rate, your result will be the amount of time it will take your initial investment to double. Another way to interpret this rule is to calculate when buying power will be cut in half. The Rule of 72 is so important to remember when considering retirement plans that include cost-of-living increases.  For example, think about dollar of retirement income in 1964, for the 50th anniversary class, and how much it would buy today. For example, as outlined in the invitation, the average price of a car was $2,300; a house cost $20,500, gasoline was $0.30 per gallon; milk cost $1.06 per gallon, and a postage stamp cost four cents.  Fast-forward to 1989, and the car was $15,350; a house cost $120,000; gas was $0.97 per gallon; milk cost $2.34 per gallon, and a stamp was $0.25.

As you think about retirement, keep in mind how inflation can impact your investment strategies. At a 4% historical long-term inflation rate, $50,000 becomes $25,000 in buying power by the year 2032 (72 / 4 = 18 years). As a goal, one should aspire to generate a return on your investments including dividends and appreciation that meets or exceeds the rate of inflation to maintain buying power. Also, consider your cost-of-living, which may vary considerably by region, house size and upkeep cost, and contingencies for healthcare and related medical costs as one ages. These are all very important factors that can actually destroy the buying power of the dollars that you have saved.  These thoughts are critical particularly for family business transition from one generation to the next.

Let’s go back in a time machine with Sherman and Mr. Peabody! Do you know what was going on in 1964?

  • Ford Mustang was introduced. Both my wife and I had red Mustangs as our first cars. Hers was a convertible.
  • The first ZIP Code was introduced. My mom said that this would be a game changer, and she was correct!
  • TV shows that were popular at that time included characters with names like Hoss, Adam, Little Joe, Ben, Andy, Barney and Opie.
  • Yes, the Cleveland Browns won their last championship, 27 to 0 over the Baltimore Colts. Jim Brown was the star runner, and quarterback Frank Ryan actually had a PhD in higher-level mathematics.

Well, that was a trip down memory lane! It is interesting to observe how the power of inflation impacts our lives.

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