I’ve personal written on inflation before and how the Consumer Price Index (CPI) may be very far off from your own personal inflation rate. Yet people still worry about inflation eating up your buying power in retirement, so I decided to look into it a bit.
I have a 2007 Andex chart which is basically a PF geeks pride and glory. There is so much data in one chart it’s almost insane. What’s interesting on the chart is it shows the CPI and some sample portfolios and provides compound returns for the last 30 years. So from 1977 to 2007 the CPI averaged at 4.1% and that time period included part of the 70’s and all of the 80’s which were high inflation years. Now then there are three sample portfolios called Aggressive (80% equity, 20 % Bonds and Fixed Income), Moderate ( 60% equity, 40 % Bonds and Fixed Income) and Conservative (20% equity, 80 % Bonds and Fixed Income). It was assumed they were rebalanced at the start of each year.
The rates of return (ignoring taxes and fees) were:
- Aggressive: 12.9%
- Moderate: 12.1%
- Conservative: 10.8%
So even adjusting those for the 4.1% CPI and fees you would still be fine with 80% in bonds and fixed income. Actually it is interesting to note that despite the increased risks that Aggressive doesn’t do that much better than the Conservative.
In general I feel most people under estimate how important it is to protect your portfolio’s capital in retirement and over estimate the inflation threat. As such they end up with more risk in their portfolio than they really need. Now obviously you need some equity exposure as an all bond portfolio might very well not cut it (for example 90 day Treasury Bills only did 7.7% over that time frame). So that is why I’m thinking about having about 70 to 80% of my retirement funds in bonds and fixed income.
That’s not to say I’ve firmly made up my mind yet, but I have yet to see an good evidence that I should have more than 30% of my portfolio in equities when I’m retired.