Inflation Question on Portfolio

[street]

Can someone explain how inflation devalues one investment that aren't being spent at the time of high inflation.

I understand that money in investments doesn't have the buying power but not spending really doesn't make them less in value, right?

Really no different than when markets go down with no high inflation and you don't sell, nothing lost till you sell.

I see a lot on here where I have XX# in investments minus inflation. If you haven't used that money or intending to sell, why use inflation numbers against your unspent investments at the time of high inflation?

Thanks

 

[jebmke]

it is always "compared to what?" The portfolio will be less valuable in real terms compared to the same portfolio (without spending) and no/lower inflation going forward.

 

[MichaelB]

Can someone explain how inflation devalues one investment that aren't being spent at the time of high inflation.

I understand that money in investments doesn't have the buying power but not spending really doesn't make them less in value, right?

Really no different than when markets go down with no high inflation and you don't sell, nothing lost till you sell.

I see a lot on here where I have XX# in investments minus inflation. If you haven't used that money or intending to sell, why use inflation numbers against your unspent investments at the time of high inflation?

Thanks

Street, I think you get it. The impact of inflation on your portfolio is the loss of purchasing power. Once you start withdrawing, those withdrawals will buy less stuff than before because prices have risen, and if you want the same standard of living as before, you need to withdraw more.

 

[38Chevy454]

Street, I think you get it. The impact of inflation on your portfolio is the loss of purchasing power. Once you start withdrawing, those withdrawals will buy less stuff than before because prices have risen, and if you want the same standard of living as before, you need to withdraw more.

What MichaelB said. You are losing purchasing power with the money, so it takes more once you take it out. You aren't losing absolute value of the money, just what it will be able to buy.

 

[Car-Guy]

My simple way of looking at it.

If I have 100k today and it earns 5% for a year. I'd have 105k next year.

But if Inflation is 5% for the year too, I'd still have 105k next year that I earned but it would only have the buying power of the original 100k. (Broke even)

Of course considering taxes, I would still have over 100k in a year but I lost the full 100k buying power that I originally had. (so I lost ground)

 

[LateToFIRE]

...I see a lot on here where I have XX# in investments minus inflation. If you haven't used that money or intending to sell, why use inflation numbers against your unspent investments at the time of high inflation?
Thanks

To add to what others have stated, the answer this last question is that it is useful to look at the future value of your portfolio in "today's dollars".

For example, let's say that you expect to have saved/accumulated a $1M portfolio in 20 years. That sounds like a lot, but what will be the purchasing power of those dollars in 20 years? If we assume inflation will average say, 3% over the next 20 years, then the "present vale" of that portfolio in today's spending power is roughly half, about $554K. It's a way of thinking about how much you'll actually need in the future.

 

[street]

Thanks for all the detailed explanation and clarification.

 

[marko]

If, however by some stroke of luck, inflation eventually goes back down in a few years, your purchasing power would return to its original position and only what you spent during the uptick would be affected. In theory anyway as many things would remain at a higher price.

 

[audreyh1]

Inflationdata.com cumulative inflation calculator does a nice job of showing you how much more it costs for something compared to the past. You choose the time interval.

https://inflationdata.com/inflation/inflation_calculators/Cumulative_Inflation_Calculator.aspx

 

[street]

If, however by some stroke of luck, inflation eventually goes back down in a few years, your purchasing power would return to its original position and only what you spent during the uptick would be affected. In theory anyway as many things would remain at a higher price.

Thanks marko. This is what I was after when I asked my question.

 

[Spock]

The difference with equity markets if they go down is they can go back up and happens frequently.
For your purchasing power to go back up, inflation would have to be negative... that rarely happens.
What are the odds we'll ever have $2.50/lb hamburger or $3.50/gal orange juice again? IMO dang near zero. Inflation reduced purchasing power is compounding and almost always in one direction.

 

[oldtimer]

If, however by some stroke of luck, inflation eventually goes back down in a few years, your purchasing power would return to its original position and only what you spent during the uptick would be affected. In theory anyway as many things would remain at a higher price.

What Your expenses go up each year because of inflation. Just because inflation for 1 year drops to 0%, your expenses do NOT drop back to ten years earlier - they just stay the same as the last year expenses.

 

[audreyh1]

Right. We rarely have deflation which causes prices to drop.

Inflation at zero means that prices stay the same. They don’t drop. You don’t make up lost ground.

So hoping that prices will come down in the future overall is a bit of a false hope - not likely.

 

[marko]

Right. We rarely have deflation which causes prices to drop.

Inflation at zero means that prices stay the same. They don’t drop. You don’t make up lost ground.

So hoping that prices will come down in the future overall is a bit of a false hope - not likely.

Y'know, every single time I get involved with numbers I get myself in trouble. This is why my company assigned not one, but two accountants to keep watch over me back in the day. Just a massive blind spot.

I stand corrected!