Last Updated Jun 23, 2010 11:11 AM EDT
Don't be fooled by today's benign inflation situation. That's not the norm, nor is it expected to persist. If inflation over the next 20 years reverts to its 50-year norm of around 3 percent that translates into a 50 percent drop in purchasing power for your retirement dollars. Playing it too safe today is a retirement planning risk you can't afford.
A recent survey of American's appetite for risk shows there isn't much:
"There appears to be something of a fundamental shift in mindset taking hold in how Americans view and manage their finances," said Greg Oberland, of Northwestern Mutual, which commissioned the survey.
"People have recalibrated their personal risk/reward meters."
Don't Take Eye off of other Retirement Planning Risks
All of that is unsurprising to behavioral economists. One of the classic human factors that bedevils investors is Recency Bias. That is, we tend to base our decisions today on what we've lived through most recently. After the brutal bear market of 2008 it's textbook that we have embraced conservatism.
But there's also a risk that by playing it safe you're overlooking other risks. Our increased longevity begets a higher risk that inflation will eat into our standard of living. Even if you are somehow convinced overall inflation is not an issue, how about medical inflation? That's run at double the overall rate of inflation, and the recent health care legislation did nothing to address spiraling health care costs. (Just a reminder: typical out of pocket medical costs for a retired couple today-above and beyond what is covered by Medicare-clocks in at $250,000.)
I'm not advocating an all-in strategy here. But nor is it advisable to swing your portfolio pendulum all the way to the other extreme and completely eschew investments that offer the potential for inflation-beating gains. Fight your recency bias that is screaming at you to play it super safe, and focus on your long-term retirement planning goals. That's ultimately the safest way to ensure you will be able to maintain your standard of living in retirement.