Inflation erosion?

[Ato]

How much should one consider when thinking about inflation erosion of (cash) value?

As an example, if someone was to save 1mil in today's terms just by putting their savings into a bank by the time they retired, how much would inflation have eroded it's value? That is, 1mil in today's terms would equal how much in, let's say, 30 years?

I realise there's no way to say for sure, but a ballpark figure?

What have historical figures been like?

So based on this, what should one do when considering inflation? Put 50% of that 1mil into an index fund or better?

 

[johnnyg]

You'd definitely want your money to be working for you some how, and greater then the inflation rate also. I guess it comes down to your appetite for risk.

I always like to think about for example putting $200000 under the bed or in a bank deposit say 30-40 years ago and what its worth today -> $200000~$500000?

Then compare that to buying $200000 worth of property at the time, (think large parcels of land on the outskirts on your town or city) and what that land value would be worth today.....5,10,15 Million?

Obviously it's not always that straight forwards but its an example I like to think about and remind myself of.

 

[esolano]

Some things to consider...

- Australia's average inflation rate is about 3.935% per year.
- If the money was in a bank paying you more than the above in interest per year then you would still be ahead I would think.

Try out this calculator:
http://www.rba.gov.au/calculator/calc.go

 

[tech/a]

An often over looked consideration.
My fater retired 30 yrs ago. He's now 85
At the time he had $400k and had a hobby farm.
Average house was 50K so was pretty well off--he thought so to.

Today he watches every penny---has worked part time up until a few years ago and is basically like any other pensioner.

Your money MUST be put to work.

 

[kincella]

well the dollar buys 5 cents today its lost 95% of buying power...now am not sure if that is from the 1930's or earlier....cannot find my source

 

[esolano]

Your money MUST be put to work.

Couldn't agree with you more. A lot of us work hard for our money. It is only fair that it works hard for us.

 

[johnnyg]

Some things to consider...

- Australia's average inflation rate is about 3.935% per year.
- If the money was in a bank paying you more than the above in interest per year then you would still be ahead I would think.

Try out this calculator:
http://www.rba.gov.au/calculator/calc.go

Make sure you take tax into consideration.

Small example, an older couple I know purchased 100 acres of land on the outskirts of their city in 1969 for ~$30000. It's taken 40 years but housing estates are slowly creeping closer and closer. I'd say within the next 10 years the property will be a new housing estate. They've had offers of $10millon+.

Not a bad return over 40 years.

Compare that to putting $30000 in a term deposit earning interest or stashed away under the bed.

 

[kincella]

actual inflation is much higher than the rate quoted....they removed the interest cost component from the cpi.....
since the cpi is used by many departments to pay wages, and pensions and other entitelments....which they try to keep paying a lower amount than the actual cost...if the cpi included interest costs...

 

[Amor_Fati]

Some things to consider...

- Australia's average inflation rate is about 3.935% per year.
- If the money was in a bank paying you more than the above in interest per year then you would still be ahead I would think.

Try out this calculator:
http://www.rba.gov.au/calculator/calc.go

If you were earning 4.5%pa (roughly the best I've seen around at the moment) you could very easily fall behind in real terms if you are paying tax at all. Even at 15% you will not keep up (4.5*0.85=3.825). At 45% forget about it.

Obviously inflation and interest rates are somewhat correlated (both tend to be low in recessions and higher in booms) but do not forget about tax as they don't care if you are only matching inflation, they will take their cut.

 

[matty2.0]

Average rates of inflation are about 2-3%. Compound that.

 

[Ato]

well the dollar buys 5 cents today its lost 95% of buying power...now am not sure if that is from the 1930's or earlier....cannot find my source

Yeah, sometime around then. After the First WW iirc. Pretty staggering loss for the US dollar.

My fater retired 30 yrs ago. He's now 85
At the time he had $400k and had a hobby farm.
Average house was 50K so was pretty well off--he thought so to.

That's a pretty sobering example Tech/A. I think you're right - the money in it's entirety must be put to work.

 

[jet328]

It is only fair that it works hard for us.

I've never seen my wallet get up and do some work! In my view this is one of the biggest cons from the finance industry sells just like "diversify & invest for the long term" ie. I've got no idea, so spread it round so I don't look stupid, while I collect my commissions uninterrupted

How can money work? If money really could work, why don't we print up a bunch and let it work for us?

You're making the assumption that inflation continues like it has. In my view, this is probably the biggest reason for the current GFC. It was just conventional wisdom that the more you borrowed in shares/property the more you made.

I won't get into the whole inflation/deflation debate but there are some very smart people betting on continued deflation. I also won't go into the fact that even after all this inflation, bonds/deposits in the US/Euro region have done very well over a significant period of time compared to the assets that "work for you"

In a deflationary environment "debt upto your eyeballs" won't be "working hard for you"

 

[Nyden]

In a deflationary environment "debt upto your eyeballs" won't be "working hard for you"

One doesn't need to be indebted up to the eyeballs just to have money working for them, though. In fact, one doesn't need any debt at all for that

 

[johnnyg]

One doesn't need to be indebted up to the eyeballs just to have money working for them, though. In fact, one doesn't need any debt at all for that

Very true, I don't think I've seen one post in the thread mention anything about debt.

 

[trainspotter]

Ato ... give ME ONE MILLION DOLLARS and come and see me in 30 years time. Then I will tell you my answer. To think that somehow between bank fees and the lovely ATO taxing you on your interest income PLUS variables etc. that you would have any money left in the account is bizarre.

Give me the chance to invest that amount in shares, property, bonds and whatever I can get my hands on (under your instructions of course) and I will safely say you will have ONE MILLION DOLLARS when I have finished.

You would be better putting it inside your mattress and sleeping peacefully at night knowing that no one is going to rip you off. Let alone the banks.

 

[bugmenot]

Quote:
Originally Posted by Nyden View Post
One doesn't need to be indebted up to the eyeballs just to have money working for them, though. In fact, one doesn't need any debt at all for that
Very true, I don't think I've seen one post in the thread mention anything about debt.

Real Estate = Mortgage = "Debt up to your eyeballs"...

 

[esolano]

Real Estate = Mortgage = "Debt up to your eyeballs"...

Look at the original post. ATO says nothing about Mortgage or debt. He talks about what would happen if someone save $1mil and puts it into a savings account. If you already have the money to invest in the first place, you don't need a mortgage.

 

[trainspotter]

Average rates of inflation are about 2-3%. Compound that.

Add CPI, TAX and bank fees to that and you end up with ZERO. Stagflation at it's best.

 

[Smurf1976]

2 to 3% inflation? I must be living on another planet as I'm pretty sure costs have risen a lot more than that.

A few random examples I looked at. Just some random prices I could find, unfortunately not for basics like food.

Petrol has averaged 5.4% per annum over the past 27 years (4.5% average over the past 9 years)

LPG (household) 5.3% over 17 years

Electricity (household) 3.8% over 19 years

Cigarettes averaged 8.5% per annum over the past 18 years

Beer (at bottleshop) averaged 3.6% over the past 14 years

Average house price (Hobart) 7.7% over 13 years

Hot chips from local shop 5.1% over 24 years

Take out the houses (bubble) and smokes (tax changes) and we're left with an average of 4.6% for those few examples. It's a very narrow base from which to calculate, but 4.6% sounds a lot more accurate than the "2 to 3%" to me based on real life experiences. The only real exception would be electronics, but it's not as though a normal person is spending on that every month and any saving there has been more than offset by the massive increase in the cost of a house.

 

[Ato]

Ato ... give ME ONE MILLION DOLLARS and come and see me in 30 years time. Then I will tell you my answer. To think that somehow between bank fees and the lovely ATO taxing you on your interest income PLUS variables etc. that you would have any money left in the account is bizarre.

Yeah, I dunno really hence I was asking

Here is something that is confusing me. I have some money (not the 1mil I use as an example, I wish lol) in the bank back in Oz. It's in one of those high interest rate account things. I've made a decent amount on interest, certainly far more than I've lost in taxes and charges. I've only had the account open for a few years, so inflation as such hasnt really changed all that much, I guess (and in the current clime, it's probably more a case of deflation).

So basically, that initial amount has increased and held it's value. (I wanted it as cash so please dont say I would be better off with something else.) I'm having trouble extrapolating that short term example of the money increasing and holding it's value over the longer term where people are suggesting it would lose a huge amount of value. I'm certainly not suggesting people are wrong, rather if someone could spell out what I'm missing that would be great.