Your Inflation-Busting Options for Retirement Savings Take on Today

Your Inflation-Busting Options for Retirement Savings

We discuss ways you can improve the value of your money — and what might not work

Getty Images/AARP

EPISODE 150 SCRIPT Hi, I’m Mike Ellison with An AARP Take on Today. It’s hard to miss the effects of inflation. Whether you’re at the gas pump or at the grocery store, you’ve probably noticed goods are getting more expensive. The Bureau of Labor Statistics just reported that inflation had climbed 7 percent by the end of 2021. It’s the highest increase we’ve seen in about 40 years. As a result, your spending power has gone down, along with the value of savings and Social Security payments. It’s unsettling, but happily, there are ways to combat inflation. We turn to John Waggoner, senior writer and finance journalist. He covers all things financial at AARP, and he says there’s plenty you can do. Mike: John, thank you for joining us. John: Thank you so much for having me. Mike: So, listen, John many listeners have experienced inflation before in the late 1970s, the inflation peaked at over 14%, but regular savings accounts kept up. Why is it different now? John: So, way back in the seventies, we had, as you mentioned, a huge spike in inflation, and that was caused mainly by the Arab oil embargo of the seventies, where we were a very energy dependent country at the time. And by shutting off the supply of oil from the middle east, it forced all kinds of things to go up because you know, when you have a big increase in, in gas prices or energy prices in general, it's just not, not just your automobile, it's your heating, it's how it's plants that make fertilizer that rely on natural gas. So, all those prices tend to go up. We had a similar spike in oil in the past couple months. That's partly because two factors, one of which is if you may remember when they first kind of started making all the preparations about COVID and locking down and everything like that, a lot of people got sick. John: A lot of industries kind of ground to a stop. And one of them was the oil industry. And the oil industry also was hit by these huge winter storms in Texas. And, you know, people don't realize it, but you need electricity to make oil and make gasoline. So that made the price of oil spike. Okay. So that was, that's one thing. And one of the biggest changes in the consumer price index in the past year and a half has been the price of oil, but it's been other things too, things that there are shortages of. There's shortages of microchips because of factory supplies in Japan, there's a big Taiwanese factory that shut down and getting them across the ocean is also a big problem cause it is supply change. So, if you get into your average car, your average car probably has as many or more microchips than the laptop you're you're looking at right now. John: And some cars like the Tesla are basically a computer on wheels. You can't make a lot of these cars without a fair amount of microchips. And so, another thing that really went up during the inflationary period, this latest inflationary period has been the price of new cars. And when the price of new cars goes up, price of bull cars goes up too, because you'll tend to, if you can't afford a new, you'll buy an old car and there's a big demand for old cars. In fact, some people are buying cars now and flipping 'em just like they were flipping houses back, actually not so long ago. So that's, what's been going on. The problem is that the federal reserve, which has mainly trying to avoid a depression, a which is basically a period of falling prices, still keeping interest rates low. And we'll see some relief in that in the next couple months, they're going to raise the fed funds rate by a quarter 0.4 times. So we'll get to somewhere around 1% savings rate at the end of the year and maybe two. Mike: So, we mentioned that inflation affects consumer spending, but how else are older adults affected? John: Well, older adults, traditionally we're most affected because a lot of people lived on pensions back in the seventies, pensions are a fixed payment. You know, if you get a pension of a thousand dollars, you're going to get a thousand dollars every year until you die. If there's an inflationary period, though, it means that your pension buys progressively less each year. And because the outcry, that was one reason that we now have cost of living adjustments in social security, we did have a nice big one, a 5.6% increase this year that starts this this year, but it's still not enough to overcome the 7% inflation that we're currently experiencing. Mike: So now as we get into solutions, what are some ways that listeners can keep up with inflation? John: Well, there's a couple things. One of which is if you're still working, you might mention to your boss that, you know, a 3% raise is kind of terrible compared to a 7% cost of living. That's a 4% decrease in your wages. Yeah. So should push for higher wages, right? And it's been a good year for most businesses and they can afford it. They are all still recording record profits. So asking for a raise is, is one good strategy. Another good strategy is that if you are thinking of buying a house or you should consider buying a house, because things that are real and things that you can touch, and hold tend to gain value. And a home of course is one of the premier things. John: So over time that mortgage payment will, will be less painful to you and you'll be paying for it in fewer real dollars. But in another way, if you have a 3% mortgage and inflation goes to 4%, which is some somewhat unlikely, but could, you're basically getting free money, right. Mm. And making money on the deal. So that's a good thing. A third thing is to make some investments that would hedge against inflation. One that I really like is the I bond, which is the savings bond issued by the United States, treasury yields 7% right now, which is just amazing. And it will yield that for the next six months and through May. And then it will reset according to the current rate of inflation. You can, you can't cash your bond for a year, but after that, you can up for the next five years, you can cash it if you lose one quarter of your interest. But if you think of it this way, let's say you got 7% for six months. And then by some miracle, inflation went to zero for the following six months. Right. Okay. All right. So, you get what 3.5% from your investment, which is about 3.5% more than you're getting on your savings right now. So it's, you would, you know, at least keep up a little bit with inflation. Mike: Sure. Are there any disadvantages to I Bonds that listeners should know about? John: Well, yeah, if you're saving for an emergency, which is, you know, everybody should have a little emergency fund for the, you know, inevitable break job or dead refrigerator that comes along in our lives. Mm. You can't cash it for, for 12 months after you buy it. So that's not a great choice for an emergency fund. And it's only quit a is probably its biggest discount. The interest is taxable, but it's not taxable by the state. It's only taxable in a federal level. Other than that, they're solid gold securities. They are the safest investments on the planet. If the government does not pay interest on its obligations, you probably have other things to worry about than your savings bond, you know, like where you're gonna get food and what kind of government you're going to have. So, I think they're, you know, for average savers, they're great. You can get them for free through the United States treasury, a lot of businesses offer them on a payroll deduction basis. Mike: So, you mentioned gold, John, you know, and gold often comes up anytime that there's any level of economic insecurity and you touched on it for a second, but can you expand a little bit about gold? What do you think about gold as a solution right now? John: There are people who have been predicting enormous spikes in the price of gold for as long as I've been covering finance. And that's been about 40 years and they've been right twice. There are right in 1980 when gold rose up to $650 an ounce from $35 an ounce. And then they were right again, a couple years ago when gold touched $1,900 an ounce. There was long period in between there when gold went nowhere, even though there was inflation. So, it was perfectly possible for you to lose 30% of your money in gold while inflation was at say 3%. What I'm saying is there's not a very clear and strict relationship between gold and inflation. It's really someone once said gold is a direct be against civilization. And I think that's a good way to put it, gold is handy when you don't have any faith in the banks, you want to flee the country, you want to leave. John: You want to be somewhere else or your banks are failed. And that way you can hold your fortune in your hand, right? The disadvantage is that people can steal it. So, then you have to figure out where you keep your gold. If you don't trust banks, you can't really keep it in a safety deposit box. And then you start thinking about wacky things like burying it in the backyard and buying guard dogs and things like that. So, there's a lot of disadvantages to gold, if you like gold coins, you know, just because they're pretty, that's a good reason to buy one. I'm not sure I would do it because I was worried about any inflation that we might expect now. Mike: And what about cryptocurrency? if I dare touch on that, what are your thoughts about cryptocurrency? John: Well, cryptocurrency, first of all, is, is not, it's not a very good currency. If you were paying your rent and dollars and your, the value of the dollar went from, I don't know, say $1 to $20, you would probably be broke fairly quickly. People want a stable currency. They don't want one that, you know, jumps around all the time. So that's, if you're thinking of it as, as a, you know, alternative to the dollar. Yeah. I don't know. I think you're better off with a dollar. They have had these huge jumps in value, but I would also mention that Bitcoin is down from about 65 to about 40 right now. So, you know, you have a large chance of losses. And the other thing is somewhat like with gold, if someone steals your actually even worse than gold, if someone steals your cryptocurrency, which is not common, but happens with a fair amount of regularity, it's gone, it's just gone forever. And so, there's that. Mike: I think the, the world at large is still learning about cryptocurrency. It seems like there's a very small population of people who truly understand it inside and out. And as a lot of financial experts and, like yourself as well, you often, a lot of experts just kinda advise if there, if you don't understand it, you probably shouldn't invest in it. You should only invest in things you truly understand. Would you, would you agree with that sentiment? John: Oh, absolutely. And the other corollary to that is that if it sounds too good to be true, it probably is. Mike: What are some other ways that listeners can expect inflation to affect them or to change over the next couple of years? John: Well, the main effect really is that you have to become more of a smart shopper. If you are at the point, it's a mentality that in with inflation, because you know, let's say five years ago, you wanted to buy a laptop, right? And part of you would say in the back of your mind, you know, okay, I've gotta buy this laptop for $2,000 and it's be worth a thousand dollars a year, two years. Right. You have a deflationary mentality, right? You just think prices gonna keep going down. And that's been true with cell phone service, not the phones themselves, but anything electronic, all these things are, are not only cheaper now, but they do more stuff than the earlier stuff. Did. The reverse of that is an inflationary mentality where you go, I have to buy this now, because if I don't, I'm gonna pay more later. Right. And so that is something that also kind of contributes to inflation, is this mindset, because people then suddenly will pay more for things because they think it's gonna be worth even more later. I don't think you'll do that necessarily in the grocery market, but you're probably gonna do that if you're buying a car or buying a house, even. So, you have to kind of say, you know, wait a minute, am I paying too much for this? Is there some way that I could get this cheap, more cheaply and what economists call that is, is basically called substitution. You know, as, as a simple example, if the cost of coffee goes to $10 a pound, suddenly you might develop a fondness for tea. Mike: Right. Right, right. Okay. Is there anything else that we haven't covered, John? Anything else that you'd like to mention to our listeners? John: Well, I think if you wanna take the long view of things from 1926 to the present, which includes the great depression and the great inflation, inflation is average three per percent. It seems to be one of those numbers. That's kind of baked into the cake. You're gonna have times when it's above that. And times when it's below that, but roughly 3%. So, you have to build that into some of your calculations. If you're planning to retire, for example, you shouldn't just assume that you can pull out the same amount of money every year. Because as we were talking before, as with a pension, you know, that will buy less and less each year. So that means you're gonna have to save more and you'll probably have to put a little more in stocks, a little more in real estate and even some in gold, if it makes you feel better. But I would certainly buy a fund for example, that invest in treasury inflation, protected securities, which is called tips. They're like the I Bonds, but they're for bigger investment investors. And a lot of mutual fund companies have these, they have shown gains of about five or 6% in the past 12 months, as opposed to regular bond funds, which have, have lost money, even, even with the interest they collect. Mike: Excellent information. I'm actually, I'm writing notes of a few things that you wrote down for myself to discuss with my family. John Waggoner is a senior writer for AARP.org. You can find his primer on inflation in the show notes, John, thanks again for being on the show. Hey, John: Thank you so much, Mike. Mike: We’ll have more resources, including a link to the Series I Savings Bonds from the U.S. Treasury available in the show notes as well. That's it for today's show. If you liked this episode, please let us know by emailing us at . Thanks to our news team producers, Colby Nelson and Danny Alarcon. Production assistant, Anita Fagbamila. Engineer, Julio Gonzales. Executive producer, Jason Young, and my co-hosts Bob Edwards and Wilma Consul. Become a subscriber on Spotify, Apple Podcast, Stitcher or other apps. And be sure to rate our show as well. For an AARP Take on Today, I'm Mike Ellison. Thank you for listening. It’s hard to miss the effects of inflation. Whether you’re at the gas pump or at the grocery store, you’ve probably noticed goods are getting more expensive. We turn to John Waggoner, senior writer and finance journalist. He covers all things financial at AARP, and he says there’s plenty you can do. On today's show, we discuss some ways you can help improve the value of your money. Not only that, but we go over what might not work. For more information: Subscribe:

How to Listen and Subscribe to Take on Today Podcast

iPhone or iPad Open the , search for the show title and select it from the list of results. Once on the show page, click the "Subscribe" button to have new episodes sent to your phone or tablet for free. Click the name of an episode from the list below to listen. Android Phone or Tablet Open the , search for the show title and select it from the list of results. Once on the show page, click the "Subscribe" button to have new episodes sent to your phone or tablet for free. Click the name of an episode from the list below to listen. To play podcasts on your Amazon Echo smart speaker, ask the following: "Alexa, ask TuneIn to play Take on Today podcast" OR "Alexa, play Take on Today podcast on TuneIn" To play podcasts on your Google Home smart speaker, ask the following: "Hey Google, play Take on Today podcast"
Cancel You are leaving AARP.org and going to the website of our trusted provider. The provider’s terms, conditions and policies apply. Please return to AARP.org to learn more about other benefits. Your email address is now confirmed. You'll start receiving the latest news, benefits, events, and programs related to AARP's mission to empower people to choose how they live as they age. You can also by updating your account at anytime. You will be asked to register or log in. Cancel Offer Details Disclosures

Close In the next 24 hours, you will receive an email to confirm your subscription to receive emails related to AARP volunteering. Once you confirm that subscription, you will regularly receive communications related to AARP volunteering. In the meantime, please feel free to search for ways to make a difference in your community at Javascript must be enabled to use this site. Please enable Javascript in your browser and try again.