With interest rates still close to all-time lows, conservative investors are realizing that traditional forms of low-risk investments are not keeping up with inflation. According to Bankrate.com, the average interest rate for a five-year bank CD is 2.13 percent, and the average bank money market is 0.12 percent APY.
Considering inflation is historically 3 percent, that discrepancy between return on investment and rising prices can be detrimental to a retirement plan. Look at it this way: If your investments are returning 1 percent per year and inflation is 3 percent per year, you actually lost 2 percent in value on your money in one year.
That might not seem like a big deal, but when you look at the increasing life expectancy in the United States, it becomes an issue. Currently, the average life expectancy is around 85 years old. Assuming that life expectancy does not increase over your lifetime, a 60-year-old retiree could be retired for 25 to 40 years.
Let's do some simple math:
• 1% interest – 3% inflation = -2% purchasing power
• -2% purchasing power x 25 years = -50% purchasing power
• -2% purchasing power x 40 years = -80% purchasing power