Q: I believe inflation is getting out of hand and the dollar will continue to decline. So I am worried about my future. I am almost 63...
Q: I believe inflation is getting out of hand and the dollar will continue to decline.
So I am worried about my future.
I am almost 63, have our house paid for, and have about six times my income in retirement savings and investments (not highly productive).
I think a good way to protect my life savings against inflation would be to buy a larger and more expensive home for us (worth about half our savings) in a nicer subdivision (ours is going down), pay cash, have no mortgage, and keep our current house as a rental.
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If inflation runs crazy and the dollar continues to decline, real estate will be the only thing that could protect our life savings.
In five or six years, when the price of the new home goes up at the rate of inflation and devaluation, we could sell it and (if needed) return to our rental home.
What is worth $400,000 today will be worth $800,000 by then.
Do you think this is a good idea?
A: Concern about inflation and the decline of the dollar is now virtually universal.
Unfortunately, buying a larger house isn’t a good way to find a safe haven.
Here are some of the reasons this path won’t work.
Houses are consuming assets.
That means it costs money to own and operate a house, even if you have no mortgage.
When you buy a larger house, you are committing to greater expenses.
Higher energy prices, for instance, will be reflected in higher utility bills. Similarly, real-estate taxes are likely to grow faster than wages, putting you in a squeeze.
Worse, the same inflation will limit the number of buyers for your house when you want to sell it.
Remember, the real pain from inflation comes when prices rise faster than earned incomes.
That’s when people are forced to make hard choices, like buy gasoline or have meals out, heating or cooling part of the house rather than all of it, etc.
Another thing you’re not considering is liquidity — houses seem reassuringly real, unlike financial assets, but you can’t sell an extra bedroom or an empty closet when you need some cash.
And you can’t put in a sell order and have cash in a few days.
The most reliable measure of security and safety we have is a very simple one. How long will your liquid resources (cash in the bank, short-term CDs, short-term Treasury obligations, etc.) support you if you have no other sources of income?
If your regular monthly expenses are, say, $4,000 and your liquid resources are $6,000, then you are secure for about six weeks.
Surveys regularly show that most Americans will be in trouble very quickly — a matter of a few weeks.
My suggestion: Look for ways to reduce your committed spending and increase your liquid resources.