A Leading Economist on How Much Inflation Could Eat Your Savings

Inflation remains stubbornly at a 40-year high, with the latest figures showing the US inflation rate hit 8.6% in May, compared to a year ago. Meanwhile, savings accounts generally pay low rates (although you may see some banks like these are now paying 1.25% or more on savings). And that begs the question: how quickly will inflation eat away at your savings – and should you even save at all? We asked a leading economics professor and two other money professionals to answer this question.

A simple way to think about the inflation rate of around 8% is: “In simplified terms, some goods and services that used to cost $100 now cost $108. This means that any uninvested money could lose value quickly if it stays at home or in an account that does not pay interest,” says Chanelle Bessette, banking expert at NerdWallet. While this may imply that you don’t need any savings at all, the pros say you should aim for 3-6 months of savings spending, even in times of high inflation. Ultimately, it’s about being able to afford your essential expenses like housing and food in the event of job loss or another emergency.

Another way to think about the impact of inflation on your money is: “If you’re, say, 60 years old and you’ve safely invested all your savings in cash and bonds, you’ve just lost 8.6% of your retirement savings in real terms over the past 12 months If you have a fixed dollar pension, its real value each year for the rest of your life has just fallen by 8.6% over the last 12 months. past 12 months,” says Laurence Kotlikoff, professor of economics at Boston University, author of The Magic of Money: An Economist’s Secrets to More Money, Less Risk, and a Better Lifeand creator of the fintech site Maxifi.

Plus, he says, with the market declines we’re seeing this year, many retirees have been zapped. “For many households, [withdrawing from] their retirement accounts from retirement so they can defer taking Social Security retirement benefits until age 70 is a no-brainer. But that’s exactly the opposite advice provided by Wall Street, which wants you to keep your accounts so they can charge you a fee,” says Kotlikoff. You can see the highest interest rates you could get on a savings account here.

And yet another way of thinking, roughly, about inflation and its impact on saving is to consider the rule of 72 – a simple formula that is used to give a very rough estimate of how long it would take to double your investment. “For the rule of 72, divide 72 by the percentage your account is earning to get the number of years it will take for your money to double,” says Certified Financial Planner Justin Pritchard of Approach Financial. If inflation was 7.2% for 10 years, prices would double over that 10 year period, because 7.2 times 10 equals 72. “Two numbers can work and you can also reverse the numbers, so 10% d inflation for 7.2 years would also double prices,” says Pritchard.

Of course, no one can predict how high inflation will be in coming years or how long inflation will stay high. “The reality is that inflation will rise or fall over the next few years, so you can only make rough estimates with the rule of 72,” says Pritchard.

Unfortunately, many Americans are already feeling the pain of inflation on their savings. “Due to high inflation and other financial burdens, more and more scammers are working side-by-side just to make ends meet. Instead of using this income to increase savings, eliminate debts or pay holidays, there has been a surge in the number of people who simply need these funds to pay for day-to-day expenses,” says Ted Rossman, senior industry analyst at Bankrate. saving at a usual rate means that not only are Americans unable to contribute to their savings, but they will also experience a decrease in their purchasing power of the savings they have.