June 25, 2012
I do a lot of retirement cash flow models. These help clients forecast their income in retirement and whether they have enough in savings.
Usually, they do.
Or, they do now. Retirement income looks good for the next few years. It may not, however, look good in 20 or 30 years. It’s not because the clients expect to overspend their savings.
It’s because the rate of growth in spending, thanks to inflation, outpaces growth in savings. An all cash and fixed income nest egg is probably not going to keep pace with inflation. A pension that is not inflation adjusted will shrink in 20 years, and it will shrink a lot in 30 years.
The risk of inflation is the reason many retirees need to own some stocks in their portfolio. Over the long term, stocks are the tool for growth and an effective hedge against inflation.