Quote:
Originally Posted by melpetezrinski
Many people don't fully understand the "keeping up with inflation" theory. It's not as simple as inflation is 10%, so I need to find an investment that matches or exceeds that rate of return. That is a flawed belief that helps financial advisors push equities. It's better to ask yourself, what has been the increase to all my expenses for a specific given time. Let's say you lived on $50,000/year and now it costs $60,000. That's YOUR specific inflation rate, which is 20%. Now, you must find an investment that covers that $10,000 increase NOT 20% to "keep up with inflation". If you had $300,000 in CD's earning 1% (yes that low and even lower!) a year ago, you were earning $3,000. CD's were earning 4% weeks ago, which would have provided you with that extra $10,000 of income and you would have "kept up with inflation". Now, this is NOT the entire picture or that I'm recommending CD's but please keep this concept in the back of your mind. Don't go chasing yield to beat inflation if it doesn't align with your risk/reward profile.
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It sounds like your analysis only addresses your current spending level. But, if you have a substantial portfolio, you need to get a return that matches the inflation rate to maintain the buying power of your portfolio. For example, if you plan to buy a $500K house in 3 years, and you have a $500K portfolio today, your portfolio needs to grow to match the inflated price that the house will cost in 3 years. Otherwise, you won't have enough money to buy the house.