For investors, it’s important to remember the “real” rate of return is critical. The “real” rate of return is often described as the “nominal” or stated rate of return minus the rate of inflation. Additionally, taxes decrease the net return from investing. In other words, if a portfolio is earning just enough to stay ahead of the general level of inflation and a portion of the return must be used to pay taxes, has the portfolio really grown in “real” terms? Probably not. In addition to taking this issue into account for private savings, the Social Security System also has the same challenge of keeping up with inflation while paying out enough income to retirees in order for them to be able to meet their basic needs. Determining whether the long-term average portfolio return is high enough to overcome inflation is important in achieving financial objectives in the future. Is retirement possible given one’s current and future desired lifestyle? Which colleges will children or grandchildren be able to attend based on the rising cost of education? Will there be funds left over to support any favorite charities? And on, and on….
During the 1980’s, given much higher interest rates and levels of inflation than we have in 2019, investment return expectations were generally higher than they are today. Click here to view full article.