Author Topic: Protect your nest egg from inflation  (Read 2444 times)

stifeler

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Protect your nest egg from inflation
« on: September 01, 2018, 06:37:27 PM »
Hey folks,

This question is from my mom really.  She has a few million to retire on.  She does not want to invest.  But she is terrified of losing her money value to inflation.  How can I find her a risk free place to protect her money from inflation?  Of course if CDs paid a higher % rate she could put it all into CDs.

Please don't say invest in VTSAX.  She is not looking to invest in anything.  She just wants to hold her money in the mattress but somehow to beat inflation without added risk.

Thanks!

Cranky

  • Handlebar Stache
  • *****
  • Posts: 1771
Re: Protect your nest egg from inflation
« Reply #1 on: September 01, 2018, 06:43:18 PM »
That is not the way that money works.

Rob_bob

  • Stubble
  • **
  • Posts: 216
  • Location: Oregon
Re: Protect your nest egg from inflation
« Reply #2 on: September 01, 2018, 06:53:24 PM »
It sounds like a CD ladder with the highest rates you can find is all you can do to minimize the inflation erosion.

Or buy some good rental properties.

spicykissa

  • Stubble
  • **
  • Posts: 158
Re: Protect your nest egg from inflation
« Reply #3 on: September 02, 2018, 01:31:33 AM »
Maybe an annuity of some sort? My husband's grandfather did that after the '09 crash when he was in his mid 70s, claiming he couldn't deal with the stress of another market downturn on his 401k. He liked the peace of mind of a set monthly amount, and believed (correctly, as it turned out) that he wouldn't outlive his money. He refused aggressive cancer treatment and managed to keep himself out of the hospital and at home on hospice, though, or it wouldn't have worked at the end.

worms

  • Bristles
  • ***
  • Posts: 370
Re: Protect your nest egg from inflation
« Reply #4 on: September 02, 2018, 02:13:56 AM »
Would index-linked Government Bonds work?

englishteacheralex

  • Handlebar Stache
  • *****
  • Posts: 1967
  • Age: 39
  • Location: Honolulu, HI
Re: Protect your nest egg from inflation
« Reply #5 on: September 02, 2018, 02:27:33 AM »
My mom is the same way. She's a widow. She won't invest. She bought a duplex and lives off the rent from one side. I've been looking into annuities because I think maybe the guaranteed return might be attractive to her. She absolutely will not invest in index funds. There is no way to convince her. Thankfully both of her brothers are wealthy and work in finance, so I think she'll be taken care of. I don't know what her financial picture is but I assume she's ok. She has always been frugal.

Just...absolutely refuses to invest! My brother and the two uncles are so involved in the financial industry and it's always been a mystery to me why she's so afraid of even simple index funds.

stifeler

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Protect your nest egg from inflation
« Reply #6 on: September 02, 2018, 08:03:45 AM »
Thank you guys this is all helpful feed back.  Not like she has anything to worry about with two kids that are surgeons (not me).  But just need to find a way to explain to her there is no guaranteed free way to do it.  OK maybe government I bonds but you can only buy $10,000 per year.

COEE

  • Pencil Stache
  • ****
  • Posts: 612
Re: Protect your nest egg from inflation
« Reply #7 on: September 02, 2018, 09:47:47 AM »
TIPS and Ibonds are probably your only option.  Both are connected to the consumer price index.

You can only buy $10k/year/SSN in Ibonds.  You can also buy an additional $5k on your income tax forms if you are getting a return.  Ibonds also protect against deflation and have a fixed rate of return in addition to a variable rate that moves with the CPI.  You pay taxes on the income when you cash in the bond.  There are no state taxes though.  I don't consider this investing since it is more of a fancy savings account with the downside that you can only buy a limited amount each year.  You have to hold them for 1 year, and get a 3 month penalty if you redeem them within 5 years.  Personally, I think this is the best thing going in protecting against inflation.  I keep a portion of my emergency fund in Ibonds.

I know less about TIPS just because I haven't invested in them (yet) so take my input here with a grain of salt.  TIPS are more risky because their value changes based on what the most recent TIPS interest rate is.  TIPS interest rates are lower than a CD because the principle changes with inflation or deflation, but the interest rate is fixed.  The interest payment is above and beyond the principle adjustment for the CPI.  The interest AND principle adjustments you earn is reported as income to the IRS and is taxable (but again, no state taxes, I believe).  You can buy and sell TIPS at any time through a broker.  TIPS are very much investing.

Buying CD's are not guaranteed to have returns greater than the CPI - in fact, generally they don't.  Dave Ramsey has it right here (IMHO) - they are Certificates of Depression.  Buying CD's are very much investing against inflation.  You're pretty much betting on a lower inflation rate than predicted.  Generally, you lose.

Any of these options are better than a 0.01% savings account though.  Ally has a 1.85% savings account right now.  State taxes are a big concern if your mother live in a state-tax state.  Inflation was 2.22% the last 6 months.

There is a lot to this and I suggest heavy reading on the treasury direct website before deciding what to invest in.

Kl285528

  • Stubble
  • **
  • Posts: 131
Re: Protect your nest egg from inflation
« Reply #8 on: September 02, 2018, 12:58:58 PM »
This is not clear thinking by your mom.
Your mom is invested.... in cash.
She is right to be concerned about inflation - but why? Why isn't she worried about other possibilities? What is this inflation fear based on? And why the great fear of "investing"?
If she has enough awareness to be concerned about one aspect of the economy like inflation, and she has a "few million" to retire on (not an insignificant amount of money), the best thing for her to do is get a little more educated on investing - Some JL Collins for her, and she'll be fine.
At least, for her, get her somewhat exposed to the stock market. Say 40% allocation, or 50% allocation - whatever gives her some downside comfort when the market takes a dive.
Inflation protection comes from investing in something besides cash.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1909
  • Location: Seattle, WA
Re: Protect your nest egg from inflation
« Reply #9 on: September 02, 2018, 01:51:11 PM »
My mom is the same way. She's a widow. She won't invest. She bought a duplex and lives off the rent from one side. I've been looking into annuities because I think maybe the guaranteed return might be attractive to her.

Annuities are something you should run away from screaming with your hair on fire.  Here's why:  Getting the guaranteed return seems attractive, but all annuities really do is just give you your own money back.  By the time you get to the break even point--that is, you got back your original money (and assuming you live that long)--your rate of return will be something like 0.01%.  Your mom is way better off being in bonds.

MrThatsDifferent

  • Handlebar Stache
  • *****
  • Posts: 1546
Re: Protect your nest egg from inflation
« Reply #10 on: September 02, 2018, 02:36:16 PM »
Does it matter if she has millions? She’s in her 50s or 60s. We she really spend all the millions in the next 30-40 years? I’m sure her money will still go far. I’d put it in the highest earning savings account and then do the CD ladder and then just leave her alone. You’re fine, the other kids are fine. She’s good. Save yourselves stress and let it go. If she was headed to the poorhouse, it would be different. She’s not.

tawyer

  • Stubble
  • **
  • Posts: 144
  • Location: SF Bay Area
  • JFDI
Re: Protect your nest egg from inflation
« Reply #11 on: September 02, 2018, 02:56:43 PM »
This is not clear thinking by your mom.
Your mom is invested.... in cash.

On point. When this comes up for me I find it helpful to distinguish between 'risk' and 'volatility'. Then compare the 30 year median annualized real rate of return of two portfolios, one in 100% cash, one in 100% domestic stock.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5623
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Protect your nest egg from inflation
« Reply #12 on: September 02, 2018, 02:58:29 PM »
How old is your mom? Risk of death > risk of inflation in most cases. There's a great calculator here you could share with her.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6728
Re: Protect your nest egg from inflation
« Reply #13 on: September 02, 2018, 05:28:33 PM »
Please don't say invest in VTSAX.  She is not looking to invest in anything.  She just wants to hold her money in the mattress but somehow to beat inflation without added risk.

Thanks!

Sorry the answer is VTSAX or any reasonable equity portfolio. She may not be looking to invest, but the solution to her fears/problems is investing in equites. Tell her she can feel "safe" and watch her money by eroded away by inflation or she can feel "scared" and stay rich.  There is a price to pay for everything in life.

englishteacheralex

  • Handlebar Stache
  • *****
  • Posts: 1967
  • Age: 39
  • Location: Honolulu, HI
Re: Protect your nest egg from inflation
« Reply #14 on: September 02, 2018, 06:18:05 PM »
My mom is the same way. She's a widow. She won't invest. She bought a duplex and lives off the rent from one side. I've been looking into annuities because I think maybe the guaranteed return might be attractive to her.

Annuities are something you should run away from screaming with your hair on fire.  Here's why:  Getting the guaranteed return seems attractive, but all annuities really do is just give you your own money back.  By the time you get to the break even point--that is, you got back your original money (and assuming you live that long)--your rate of return will be something like 0.01%.  Your mom is way better off being in bonds.

Look, I'm not saying any of this is a great idea. Everything freaks her out except real estate that she literally lives next door to. Trying to explain to her how risk/volatility exists in literally everything is a great way to make me blue in the face. She's kind of excited about reverse mortgages, for crying out loud.

stifeler

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Protect your nest egg from inflation
« Reply #15 on: September 03, 2018, 07:26:20 AM »

Sorry the answer is VTSAX or any reasonable equity portfolio. She may not be looking to invest, but the solution to her fears/problems is investing in equites. Tell her she can feel "safe" and watch her money by eroded away by inflation or she can feel "scared" and stay rich.  There is a price to pay for everything in life.
[/quote]

I hear you but if the market drops 20% in her 80s she'll die very mad at me, she never wanted to put the principle at risk in the first place.

stifeler

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Protect your nest egg from inflation
« Reply #16 on: September 03, 2018, 07:28:52 AM »
Does it matter if she has millions? She’s in her 50s or 60s. We she really spend all the millions in the next 30-40 years? I’m sure her money will still go far. I’d put it in the highest earning savings account and then do the CD ladder and then just leave her alone. You’re fine, the other kids are fine. She’s good. Save yourselves stress and let it go. If she was headed to the poorhouse, it would be different. She’s not.

I totally agree.  Its just her who keeps bringing up this topic of inflation, it never crossed my mind before lol.

FIRE 20/20

  • Bristles
  • ***
  • Posts: 338
Re: Protect your nest egg from inflation
« Reply #17 on: September 03, 2018, 08:33:58 AM »
It seems to me that we're treating a relationship question as a financial question.  How old is your mom and what is her withdrawal rate (or what is "a few million" and how much of that does she spend per year)?  I would assume she's at least 60, has at least $2M, and probably doesn't spend more than 50k of that per year.  In addition she has family who could support her if needed.  As a result, it seems to me this isn't really a question about the best way to invest.  It's a question about how to get her into something reasonable (minimal risk of principle loss, minimal loss due to inflation) - not something that's ideal.  If she's in as good a position as it seems then that's probably ok. 
If you treat the question as a psychological one rather than a financial one, then you might look at different answers.  Could you find a fee-only financial planner who is a fiduciary to talk to?  Meet with them first to make sure they will be open to ideas you agree with and then take your mom to them.  Again, if she has millions then a few hundred dollars (or even $1k) is a drop in the bucket but it would not just get her into something that meets her needs but also gives her peace of mind.  Finally, you said, "I hear you but if the market drops 20% in her 80s she'll die very mad at me".  Having a financial expert you trust making the recommendation should mostly get around that problem as well.  Normally I am not a fan of going to financial planners, but in this case it might be the right approach. 


Laura33

  • Handlebar Stache
  • *****
  • Posts: 2323
  • Location: Mid-Atlantic
Re: Protect your nest egg from inflation
« Reply #18 on: September 03, 2018, 09:00:46 AM »
My typical approach is to explain that there is no such thing as “risk-free.”  If you invest in the market, you risk losing money in a dip.  OTOH, if you keep your money in “safe” investments like cash or CDs, you risk losing buying power to inflation.  And unfortunately, the latter risk is almost guaranteed.  So keeping your money in cash is trading a risk of loss for a guaranteed loss - all for an illusion of safety.

But it sounds like you have already had that conversation, many times.  So if she isn’t willing to listen, why continue to talk?  Why not just say something like “sorry, doesn’t exist,” or “sorry, can’t be done” - and then change the subject?  You can’t help someone who refuses to be helped.  She is a grown-ass woman, and she is entitled to make dumb-ass decisions if she wants to.  Especially since there doesn’t seem to be a real risk to her, given the amount of money she has saved.  Just let it be, tell her she’ll be fine when she frets, and don’t engage. 

pecunia

  • Handlebar Stache
  • *****
  • Posts: 1192
Re: Protect your nest egg from inflation
« Reply #19 on: September 03, 2018, 04:50:13 PM »
I believe Fidelity does sell some annuities that have a "kicker" for inflation.  The inflation adjusted annuities cost more than the conventional type.

I've read so many posts telling me to avoid annuities, that I have rejected that idea.  J. L. Collins always makes a lot of sense and he infers that they are a bad idea for most people.

https://jlcollinsnh.com/2017/04/14/sell-sell-sell-sell/#comment-4220141

He discusses annuities in the comments.


PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Protect your nest egg from inflation
« Reply #20 on: September 03, 2018, 05:37:59 PM »
No to annuities, just no.

CDs, iBonds, perhaps good old savings bonds up to the yearly max would be fine.  She has enough and a 5 year CD or bond ladder will mostly help her to mitigate some of the inflation risk she worries about.  Explain that if rates rise, she will get more as they roll over in the future. Make sure she keeps an eye on rates if bank doesnt pay market on renewals.

Likely she doesnt need to grow her wealth, which is good.  The simple message is that sinve she has no interest in risk, she will get no growth.  That is ok at later stages.  Let her earn some simple interest and spend it down, while you focus on growing your own stash.

Sub obtimal from a financial portfolio standpoint, sure, but it is her life.  People also take suboptimal jobs from a financial standpoint too, but we dont beat up teachers for pursuing a sub optimum income because that is their choice.  Last thing you want is for her to lose half her life savings to a market correction or some shady insurance company that goes under and blame you.
« Last Edit: September 03, 2018, 05:41:55 PM by PizzaSteve »

bugbaby

  • Bristles
  • ***
  • Posts: 387
Re: Protect your nest egg from inflation
« Reply #21 on: September 04, 2018, 08:32:53 AM »
I have 10% in a Vanguard municipal bond fund. I think vhwax. So far it yields about 3.3%.

Sent from my KIW-L24 using Tapatalk


koshtra

  • Pencil Stache
  • ****
  • Posts: 669
  • Location: Portland, Oregon, USA
    • Mole
Re: Protect your nest egg from inflation
« Reply #22 on: September 04, 2018, 09:17:07 AM »
Your talking point -- since she is operating on an anxiety basis -- is that there's nothing particularly safe about cash. She's betting on the competence, good faith, and good luck of the US Federal Reserve. She'll probably do fine, with her real assets dwindling at 2 or 3 percent per year, but you can point out that, if she's holding millions in cash, inflation is eating away several thousand dollars' in real value every year. By design. The people running the Federal Reserve are (very properly) *trying* to make the American dollar lose value every year.

There's no such thing as financial safety: the closest imitation of it is diversification. If I were her, I'd feel the risk of holding nothing but American dollars acutely: she's willing to take on more risk than I am.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
Re: Protect your nest egg from inflation
« Reply #23 on: October 02, 2018, 05:46:59 PM »
Maybe a bond fund is a good idea.  Value may flux a bit, but should preserve buying power.  CDs and Tips mentioned already.  I would prefer a vanguard bond fund to annuities.