Outpacing Inflation

While often the result of a positive force - economic growth - inflation can have a serious effect on investors' portfolios if their income and investments are not keeping pace. Look at what happened to the cost of a bag of groceries between 1977 and 1997 -- and what that same grocery list could cost in 2017.


Look at the soaring cost of a college education.


Between 1978 and 1998, inflation ate away nearly two-thirds of a dollar's purchasing power.



These examples make the point all too clearly: over time, inflation's effects can be insidious. Consider this: If inflation was to continue at a modest 4% rate over the next 35 years, a 30-year-old earning $30,000 a year today would have to be earning $118,380 at age 65 just to keep even with inflation!

Fortunately for most of us, our compensation tends to keep pace with inflation. The parents of today's 30-year-old would have thought a $30,000 annual salary was a king's ransom when their child was born. (Their equivalent compensation would have been about $9,300.)

But where inflation can really hurt is in retirement unless it is taken into account when building your retirement fund. Suppose the 30-year-old in our example retires at age 65 and expects to live in retirement for 20 years. The $118,380 annual income at retirement would need to grow to $249,409 by age 85 -- again, just to stay even with 4% inflation!


WHAT YOU CAN DO TO EASE INFLATION'S EFFECTS

Start your financial plan early. Use the power of compounding to help accumulate wealth faster than inflation takes it away by reinvesting all dividends and capital gains in additional shares of your mutual funds.

Look for investments that have the opportunity to beat inflation. Based on broad stock market indexes such as the S&P 500 and the Dow Jones Industrial Average, over long periods of time common stocks have outpaced inflation, as measured by the Consumer Price Index. Although past performance is not indicative of future results, it's a good idea to include some stock investments in your portfolio even if you're investing mainly for income.

Consider investing in growth mutual funds. These funds target stocks of companies that tend to be industry leaders with above-average historical growth rates -- thus offering the potential to increase in value over time and to offset the effects of inflation.

Diversify. Build a portfolio of investments to spread the risk in case one or more of your investments under performs.

* Sources: For 1977 and 1997 figures: Putnam research, U.S. Bureau of Labor Statistics Retail Food Index, and National Center for Education. The 2017 figures are based on a projected 4% annual inflation rate. Past performance is not indicative of future results.