Road to Retirement: Financial Repression Is Crushing Retirees

The comments below are an edited and abridged synopsis of an article by Charlie Farrell

Inflation is here, and the amount of interest you can earn on money market funds etc. is going nowhere. That’s called financial repression, and it’s making it hard to retire.

Road to Retirement: Financial Repression Is Crushing Retirees - BullionBuzz - Nick's Top Six
Color image depicting a senior man in his 60s in an underground subway tunnel. His expression is one of despair, sadness and depression. His hands are covering his face in a gesture of bleak desperation and hopelessness.

Financial repression is being engineered by the Fed, which is driving up inflation and keeping interest rates low. That means the price of everything you need goes up but the interest you can earn to pay for those things doesn’t.

In prior economic cycles we didn’t have financial repression, but it started after the 2008 financial crisis and today the gap is the widest ever, with inflation running at 5% and short-term interest rates running close to 0%.

While inflation may recede, the repression will likely continue, meaning interest rates will remain below the rate of inflation. If inflation is 3% and short-term interest rates remain close to 0%, over 15 years you will lose about half your wealth in terms of purchasing power.

Without some change in federal policy, you will either lose purchasing power each year, or invest more aggressively. While the latter can be scary during retirement, running out of money as inflation eats up your nest egg is just as bad.

If you earn 3% less than inflation for 15 years, you’ll lose about 50% of your purchasing power. But if you invest more money in the stock market, the odds are small that you’ll lose money over 15 years. Historically, there has never been a negative 15-year cycle in the stock market. There are no guarantees, but it’s reasonable to assume the odds of a loss are less than 5%.

When assessing risk in financial markets, it’s also important to put it in perspective compared to other risks in your life.  We drive cars, fly on planes, etc. We live with all sorts of risks; investment risk is just one of them. The best you can do is make rational judgments based on the risk and reward tradeoffs.

Look at the basic tradeoffs between being too conservative versus being more aggressive given the financial repression we face. If you are conservative, you will likely lose wealth over the long term, and if you are aggressive, you are likely to build wealth. So, allocate more money—but not all of it—toward building wealth.

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