In this day and age of uncertainty, people want to feel safe. That desire is especially prevalent in the world of investing. But when I ask investors to define safe, I receive a variety responses.
Most consider safe to mean “with minimal or no risk.” So it’s understandable that they feel bank and credit union deposits provide the ultimate in safety. After all, the principal doesn’t fluctuate and there’s an extra layer of protection from either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).
So, are they correct in assuming that bank deposits are safe and carry no risk? Well, it depends on how you define both risk and safe. Let me explain.
Using the Bureau of Labor inflation calculator as a measuring stick, one of the daily financial updates I receive recently compared the buying power of $10 today to what it could buy in years past.
To equal the buying power of $10 in 1969, you would need $72.19 in your pocket today. If you spent $10 celebrating our nation’s bicentennial in 1976, you’d need a lot more to enjoy that same celebration today. $41.95 to be exact.
The meltdown of 2008-2009 is still fresh in many minds. But as bad as the meltdown was, today, just ten years later, you’d need $12 to buy what $10 bought back then.
What I am describing, of course, is inflation. It eats away at your buying power. Simply stated, $10 put in the bank twenty years ago is still $10. But it can no longer buy the same amount of goods.
So, while the money in the bank was “safe,” it ultimately lost purchasing power over time. And that being the case, can you really say your money in the bank truly safe?
Please don’t misunderstand. I’m a strong advocate of having an adequate cash reserve in the bank. It certainly is comforting to know you have a bucket of money that won’t lose principal in the event of a financial downturn. Knowing your principal is intact brings piece of mind, but over time, based on long-term historical data, the buying power erodes.
Nobody likes to see the value of his or her financial statement decrease. And with bank deposits, it doesn’t decrease. That’s a major reason why bank and credit union deposits are so popular.
As people are living longer and longer, a twenty-five year retirement is not unusual. Again, going by history, there’s a high probability the cost of living will increase over time.
Do you believe, for example, that the cost of senior housing or assisted living will rise? You can bank on it!
That’s why it’s equally important to have money stashed away that has a chance to maintain its purchasing power, especially throughout your retirement years.
Money in the bank may be safe and feel safe, but money in the bank is very susceptible to losing its purchasing power over time. At the end of the day, you need to be diversified. It’s prudent to put some of your money into different asset classes.
To help minimize overall risks and keep up with rising costs, I suggest you meet with an advisor to review your portfolio and risk tolerance, develop a balanced strategy and make adjustments as deemed necessary.