By now, you may be wondering when we are going to provide detailed examples of how to pensionize your nest egg and allocate your retirement accounts across the various retirement income products available. But before we are ready to do that, we need to have a conversation about a very fundamental aspect of money itself—inflation. In this chapter, we’re going to explore how to ensure that your nest egg doesn’t rot away in the nest before you spend it.
You’ve undoubtedly heard the expression “a bird in the hand is worth two in the bush.” While this saying probably isn’t about inflation, it certainly fits because a dollar today is worth more than a dollar tomorrow, and both are worth much more than a dollar will be in 20 years. Now, why is this? Because that same dollar you started out with will buy much less over time. Sure, this loss of purchasing power might not be evident on the time scales of weeks, months, or even years, but it definitely becomes evident over decades and over the term of your retirement—possibly 30 or 40 years.
Here’s an example. Perhaps you remember what a stamp, a dozen eggs, or a quart of milk cost 20 or 30 years ago. It was a fraction of today’s cost, which is essentially all to be blamed on the impact of inflation: it causes money to decay over time, like rotten fish and spoiled eggs. (Okay, we are pushing it.)
Exhibit 4.1 displays the annual inflation rate in the United States, the United Kingdom, Canada, Australia, ...