Inflation is a constant tax, of course, making your money worth less and less as time goes on. When under control, it’s more like a mosquito bite, itchy and annoying but ultimately not harmful.
But when inflation starts to get out of control, problems abound. What’s a retiree to do, withdrawal-wise, in an era of high inflation? How have similar conditions worked out in the past? Let’s take a look.
As I started playing around with the data, though, I realized that the story of inflation (and the techniques used to fight it) has evolved over the last century.
At the beginning of the 20th century, politicians and economists really didn’t know what to do with inflation, and as a result made some decisions that, while they seemed like they made sense at the time, actually made the problem worse.
First, let’s look at 1973 to 2003. In this scenario, our retiree starts right after the gold standard ends, and one year before the Watergate scandal. So, plenty of political turmoil and uncertainty is on deck for our unfortunate investor.
We start our retiree with a $1,000,000 portfolio and have them begin withdrawing $40,000. We make sure that our retiree increases their spending by each year’s inflation number so that it keeps their buying power constant.