Cheerios:  A Retirement Lesson

For years now Cheerios have been the most widely known breakfast brand in the United States.  Everybody seems to have them in the pantry.  When I was a kid my favorite breakfast was a bowl of cheerios with banana slices and sugar (LOTS of sugar).  My Mom rarely bought the expensive sugary cereals like Fruit Loops, so I would sneak in some extra sugar into my Cheerios when she wasn't looking.

So what do Cheerios have to do with retirement?  Quite a lot, actually.

As of this morning Walmart is selling the common family size box of Cheerios for $3.64.  Pretty fair deal, right?  Most folks entering a 30+ year retirement today probably don't worry too much about the affordability of a box of Cheerios.

Cheerios Inflation:  2.7 TIMES!

But let's pretend the retiree is you and you retired 30 years ago, in 1991.  According to the U.S. Bureau of Labor Statistics, cereal prices have risen 1.53% annually since 1991.  When you retired in 1991, that same box of Cheerios cost a mere $2.30.  The 1991 version of you might be a little shocked walking into the grocery store today and seeing Cheerios selling at $3.64.  That's 58% higher than the price when you first retired! 

The story could have been even worse.  Cereal inflation over the past 30 years was only 1.53% annually, which was actually lower than the general level of inflation at 2.26%, and far lower than the long-term average U.S. inflation rate of 3.42%.  If cereal inflation had been as high as the long-term inflation rate, your box of Cheerios would cost $6.31 today.  That's 2.7 TIMES more than they cost when you retired.  Ouch!

And it's not just Cheerios you have to worry about.  Everything you buy today will cost 2.7 TIMES as much in 30 years as it does today.  Everything you buy-- food, clothing, electricity, gasoline, prescriptions, home repairs, doctor visits, vacations, all of it.  2.7 TIMES!

How confident are you that you've saved enough for retirement at today's prices?  How confident are you your portfolio will keep pace with future prices?

Purchasing Power

In terms of purchasing power, a dollar in the bank today will only buy 36 cents worth of goods in 30 years.  So a $1,000,000 million retirement account today, safely "invested" in cash at the bank, would effectively shrink to $364,640 by the end of retirement.   That's equivalent to your portfolio losing 64% of its value! 

So, to simply tread water in terms of purchasing power, your retirement account would also have to grow by 2.7 TIMES over the 30 years of your retirement.    

The Biggest Fear vs. The Biggest Risk

Clients tell us their biggest retirement fear is outliving their money.  But when we ask what might cause that to happen they usually say something about the risky stock market wiping out their hard-earned retirement savings.  Stocks aren't risk-free, but they play a vital role in retirement portfolios.  

In reality, the most pervasive and damaging threat to retirees is inflation.  Inflation is always with us and it affects all of us.  There is no escaping it.  They say the only certainties in life are death and taxes, but inflation deserves to be on that list as well.  From the day you retire, you are on a guaranteed path to steadily lose 64% of your retirement portfolio to inflation.  

Clearly, sticking all your money in the bank is not a viable plan.  Inflation will decimate your purchasing power.  You need to invest in assets with the potential to grow at least at the rate of inflation.  The stocks of well-run dividend growing companies have historically fit this bill very well.

Seek Balance

We've been helping clients prepare for, and thrive in retirement for over three decades.  Our clients' continued financial success is exceeded only by their success at the game of life.

When we build retiree portfolios at Oxford, we seek a balance between Stability and Growth following the principles outlined in our proprietary Power of 5 Investing system. Our goal is to help clients achieve inflation-beating growth in their wealth, while managing through market downturns, ultimately helping clients leave a legacy to the people and places they love.  Our system has been battle tested in 25+ years of market ups and downs and is ready for whatever the market can throw at it.

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