Stamps Prices Increase Again This Month

The US Postal Service has announced yet another increase in the price of a postage stamp. This is old news but I bring it up to illustrate how inflation can erode our buying power. Take a look at the images on the left. In 1976 a first class stamp cost only 20 cents, later this month it will reach 41 cents. That is a little over double the cost in the last 31 years. Some of you may remember all these stamps, for some it will represent a span of time longer than their years on earth. No matter, the point is this period of time represents relatively benign inflation rates. A postage stamp has averaged just a 2.3% inflation rate over this last 31 years yet
your cost of living has doubled. Even small inflation rates can be
devastating over the span of a human life. So what can you do
to protect yourself?

You should understand that real return (gross return after taxes and inflation) is the true measure of your progress. If you are currently earning 5% on a CD or money market account your after inflation return is about 2.5%. If you earn 10% from a stock investment your after inflation return is about 7.5%, about three times the after inflation return of a fixed income investment.

If you are retired and living on a fixed income portfolio you can only spend around 2.5% of your portfolio value each year. The rest has to be reinvested just to keep you even with inflation, or else you should
expect to eat half as much 31 years from now!

Converting your investments from the accumulation phase to the income phase does not mean things get easier, in fact providing a reliable long term income stream from your investments is more challenging than accumulating those assets to begin with.