An Easy Solution to a Retirement Inflation Worry
Companies / Pensions & Retirement Jul 23, 2010 - 07:31 AM GMTBy: DailyWealth
Dr. David Eifrig, writes: "I'm worried, Doc... I hear so much talk on television about the government printing money and destroying the dollar."
Like many retirees, my friend Chris is worried about government spending... about taxes... about Social Security... and about inflation destroying his nest egg.
I don't blame him. I've been in the financial markets for over 30 years, and I've never seen such extreme government overreactions to economic problems. I'm sure it's going to cause problems years down the road. But if you're worried like Chris is, here's a chart you have to see... and a solution to your worries.
One thing that has folks worried is the threat of inflation. Many analysts point out the Fed has been "pumping money" into the economy to fight the recession. This will lead to inflation, the analysts say.
But my chart today shows inflation just isn't a danger right now...
The chart above displays the past year's reading of what's called the "M1 money multiplier." This measures how quickly money is flowing around the economy. All you need to know about this reading is if it's over 1.0, banks are taking their depositors' money and loaning it out – money is flowing. As long as it stays below 1.0, the money is not circulating. As you can see, it's well below 1.0 right now.
This tells us one major thing...
In spite of the government's best attempts to stimulate the economy, things remain slow. Factories aren't buzzing. Jobs aren't being created. And prices have decreased. This is not inflation, but deflation.
Until I see a major change in the speed of money flowing around the economy, I believe we're in line for more deflation before we see inflation... Possibly years of it. Fortunately, there's a great way to earn safe income no matter what happens...
You see, while I'm not expecting inflation soon, I like to have insurance in case I'm wrong. That's why I like securities that provide a steady stream of income that increases my wealth during deflationary times... but also have the ability to increase in value if inflation picks up.
One such security is called the Vanguard Inflation-Protected Securities Fund (VIPSX). The fund trades just like a stock, and you can buy it from a full-service or discount broker.
VIPSX invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government. These bonds are called TIPS (Treasury Inflation-Protected Securities). They protect you from inflation by increasing their interest payments and your principal if inflation increases.
If the Treasury signals deflation, the coupon payment and the principal value decrease accordingly. But that doesn't mean you're not protected from deflation. If you hold the bonds to maturity, you (or in this case, VIPSX) gets the entire principal back from the U.S. government – 100% guaranteed. This is perfect protection should we experience deflation. As other asset prices fall, our investment holds steady.
To sum up... until money starts flowing around the economy, inflation isn't much of a worry. But by sticking with "win either way" securities like the VIPSX, you'll be protected no matter what.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
P.S. In addition to this "win either way" idea, I've compiled a big list of ideas and strategies you can use to begin living the retirement you were promised – and deserve – without doing any extra work or taking big risks. I'm talking about ways to earn more investment income and how to get things like free golf, free cars, free vacations, free drugs, free utilities... even free money. You can learn more about accessing this unique list here.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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