Retirement Savings’ Purchasing Power at Risk from Surging Inflation

It has been a long time since the U.S. has seen sustained inflation much above the 1-2% range. But it appears as though the nation may be on the verge of having to wrestle with a meaningful inflation problem once again.

Eyebrows were raised a couple of months ago when the Bureau of Labor Statistics reported a year-over-year jump in April’s Consumer Price Index (CPI) of 4.2%. Even professional observers were caught off-guard by the figure. A Dow Jones survey shortly before the BLS announcement indicated economists were expecting a more modest increase of 3.6%.

Fed officials also registered their surprise at the magnitude of the leap, but tended to downplay the data’s significance as merely a sign the nation was on the road to economic recovery from the pandemic.

Anyone who thought the April CPI number was going to be a case of “one and done,” however, found themselves subject to a rude awakening the following month when May’s CPI came in at an even 5% from the previous May. And then just a couple of weeks ago, we learned June’s CPI moved even higher: 5.4%. It is the biggest year-over-year CPI increase since August 2008.  

These sharp moves higher in the CPI – three months in a row – certainly have raised concerns among savers that we could be on the cusp of a genuine inflation problem. But that’s not all. The leaps have prompted some to wonder if we’re on the way to revisiting the economic worst of the 1970s, when inflation sat in double digits for many months and even rose above 13% at one point.

I think the chances we could see inflation rise to such dramatically high levels this time around are very small. But it’s important for savers to recognize that it doesn’t take double-digit inflation to significantly impact their retirement security. That’s why I think this inflation discussion right now is so important. As it turns out, even sustained inflation at a level many might think of as being less consequential can greatly reduce the purchasing power of retirement savings.

Fortunately, there are steps savers can take to potentially help minimize the long-term impact of inflation on their hard-earned dollars. One of those steps is to include precious metals among their base of assets. Precious monetary metals such as gold and silver – seen by so many the world over as stores of value – have the demonstrated capacity to thrive in the face of inflation. Accordingly, astute retirement savers interested in establishing an inflation-fighting regime within their savings structure might consider including metals as a part of that effort.

Study: Even 2% Inflation Can Greatly Reduce Value of Social Security Benefits

As I noted at the top of this piece, many years have passed since the last time the U.S. experienced sustained inflation at a meaningful level. And it has been 40 years since we’ve seen double-digit inflation in this country. The reality is that inflation – particularly dramatic inflation – simply has not been relevant to retirement savers for quite a while.

My fear, then, is that there may be a temptation on the part of some savers to perhaps hear about inflation levels of 4% and 5% – considerably more modest than what Americans had to wrestle with in the 1970s and early 1980s – and disregard those numbers as being of little consequence.

That would be a grievous error, in my view. The fact is that even modest – or modest-sounding – levels of inflation have the potential to significantly impact retirement security.

I’m reminded of a study that came out some years ago from the LIMRA Secure Retirement Institute that illustrated the degree to which seemingly minimal inflation could reduce over a 20-year period the real value of what at the time was the average monthly Social Security benefit ($1,341). LIMRA found that an assumed inflation rate of 2% would whittle down the real value of the $321,840 paid over two decades by more than $73,000. Raise that inflation rate by just 1% and the news gets a lot worse: 3% inflation over those same 20 years would reduce benefits by more than $117,000.

The impact on Social Security benefits is bad enough, but of course the insidious effects of inflation can wreak havoc on the real value of “regular” savings, as well. According to a recent survey, 36% of Americans between the ages of 60 and 69 have accumulated retirement savings in the range of $100,000 to $500,000. For the sake of this discussion, let’s say you’re one of those who’s managed to sock away the half-million dollars. Sounds pretty good – but wait; there’s more.

It turns out that 3% inflation rate which reduced actual Social Security benefits by almost 40% over 20 years in our example from just a minute ago would shrink the actual buying power of the $500,000 nest egg down to a little less than $277,000 over the same 20 years. Looking at it another way, if you wanted to preserve the buying power of the $500,000 you have today in year 2041, you’d have to further grow that savings to a little more than $900,000 over the next two decades.

1970s “Great Inflation” Decade Saw Gold and Silver Soar 

Are you surprised to learn just how substantial an impact even relatively modest levels of inflation can have on savings over just a couple of decades? I get it. After all, when we think of economy- and savings-destroying levels of inflation, we tend to think in terms of hyperinflation. Zimbabwe, one of several countries famously plagued by hyperinflation, historically has had to deal with inflation percentages in the millions. As recently as last year, Zimbabwe inflation approached 1,000%.

But as the previous examples clearly demonstrate, you don’t have to contend with such outrageous levels of inflation to have a significant problem holding on to your savings’ purchasing power. You don’t even need to be faced with the double-digit levels of inflation – extremely mild by Zimbabwe standards – that hammered American consumers throughout much of the 1970s and early 1980s. In fact, as we saw earlier, you don’t need much of an inflation problem at all in order to, well, have a problem.

So what can you do about it?

I’ve referenced the 1970s a few times in this piece. The decade obviously is very illustrative of persistent, problematic inflation in American history. But as it turns out, it’s also illustrative of precious metals’ capacity to appreciate in acutely troubled economic environments of which inflation is a prominent feature. From January 1970 to January 1980, gold and silver soared 1,500% and 2,100%, respectively. The decade of the “Great Inflation,” the 1970s, is, in my opinion, one of the best historical examples of precious metals’ potential to strengthen amid a highly inflationary climate.

As I said earlier, I think it’s very unlikely we’ll see inflation reach the heights it did in the ‘70s. By the same token, I think it’s unlikely this time around we’ll see gold and silver perform as they did during the decade of the “Great Inflation.”

But given not only the real-time signs inflation is back but also the Biden administration’s massive spending plans for the next decade as well as the Federal Reserve’s continuing commitment to keeping interest rates at record lows, it’s hardly unreasonable to think we’re in store for chronic inflation at levels on par with those cited in the examples noted earlier. Astute retirement savers will take notes and perhaps recognize precious metals’ potential to mitigate the long-term damage that dollar erosion can inflict on the true value of their hard-earned savings.