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I am doing some modeling on retirement savings. Variations on the rate of return for savings during retirement (this is, after one has retired) as well as the inflation rate yield very different horizons for how long money can last.

However, I think that that a great question to ask is if it's reasonable to expect that the ROI - inflation >= 0%. This is, that at least I can assume that the value of my retirement money will not decrease over time. My gut feeling is that this should be possible, even having a conservative investment strategy (bonds, bank savings accounts), but I'd like to hear from others if this theory is reasonable.

Edit: added wording to stress that the ROI/inflation I am asking for is that taking place when one has retired and is withdrawing retirement money for living.

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  • How far in the future do you expect to be withdrawing this money from your retirement? Investment length has a huge effect on best investment strategy, because in the very long term, the nature of "what risk is" changes.
    – Harper - Reinstate Monica
    Jan 2, 2022 at 20:48
  • To clarify, my question is how to keep my saved money above inflation after I have retired but with a low enough risk so I am not in danger of losing it all overnight.
    – Omar
    Jan 3, 2022 at 2:39
  • Risk and return are interconnected. In a nutshell, no risk, no gain. You will need to learn about different possibilities, and find your sweet spot between risk and gain.
    – Aganju
    Jan 3, 2022 at 5:20
  • @Omar to be more precise, what you're worried about is a market-based equity like an index fund taking a nose-dive due to volatility at an untimely moment, where you don't have enough time left to simply wait for it to recover. That is a fair concern, and it's part of all competent retirement planning.
    – Harper - Reinstate Monica
    Jan 3, 2022 at 19:01

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It rather depends on what you mean by "reasonable".

In a free money market, nobody with any sense would lend out money at an interest rate below the rate of inflation. Because it would mean that when the loan was paid back, the lender's money would be worth less than it was when they lent it out. And they have taken on the risk of the borrower defaulting.

But the markets haven't been free for a long time. Interest rates are set by central banks, and many central banks around the World have set their rates at levels well below inflation. If a central bank is willing to lend money to big institutional investors at 0.25% interest, then nobody is going to pay you a rate that's several percent higher to borrow your money.

Given that you're competing with someone with effectively unlimited money, who has made it a policy to lend out money at a very low rate, you can't expect to make any return whatsoever, after inflation, investing in safe things like bank accounts or government bonds.

This has been going on since the banking crash of 2008, and there's no sign that anything is going to change in the near future.

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  • To be honest, only the lowest risk institutional customers get that good of a rate. Higher risk bonds (at least bond funds) last year yielded 3.8%. Still below last year’s inflation, but I expect that to change.
    – RonJohn
    Jan 3, 2022 at 13:42
  • It's not obvious that interest rates would rise to inflation or above even without central bank intervention. Ultimately they'd still be driven by supply and demand and there might still be lots of people who think that receiving some return is better than receiving nothing.
    – GS - Apologise to Monica ♦
    Jan 3, 2022 at 19:32
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Inflation and interest rates are related but somewhat disjointed measures. Inflation, by its strictest definition, is the change in purchasing power of a currency, usually measured by the real cost of some basket of consumer goods (the Consumer Price Index or CPI). The price of those goods can change for many reasons, only one of which in interest rates. With higher interest rates, people are (relatively) more willing to save than to spend, and since there is less money buying things, demand is lower, and prices go down. With lower interest rates, people are borrowing more (and spending more), increasing demand, and prices go up.

But, prices can be affected by supply increases and decreases as well, or for other reasons not related to interest rates. And those reasons can be cyclical and/or transitory, as many believe that the current increase in inflation is. And also remember that inflation is often "self-correcting". Higher prices lowers demand, which lowers prices (I'm greatly oversimplifying economic theory here and ignoring many nuances to these theories)

So is it reasonable to expect an ROI on investments higher than inflation? Sure - but recognizing that you may have periods of higher-than-expected inflation and periods of lower-than-expected inflation, so it may not be the case where your investments always beat inflation.

If inflation is a large risk for you, you could always look at investments that are inflation-protected, meaning that their value increases or decreases based on some inflation measure (usually CPI). These investments don't have expected returns higher than very low risk investments (like CDs), but if inflation is higher than expected, they will pay out more, and vice-versa.

If you have a long investment horizon (10+ years), then you should be able to take on more risk in the short-term in exchange for larger returns (on average) in the long-term, and you should most definitely expect to beat inflation.

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  • If inflation is a large risk for you, you could always look at investments that are inflation-protected Thanks, this is helpful. Do you have specific examples of US investments that are inflation-protected?
    – Omar
    Jan 3, 2022 at 2:32
  • @Omar TIPS bonds and Series I Savings Bonds.
    – RonJohn
    Jan 3, 2022 at 13:48
  • The Fed now says that inflation is not transitory.
    – RonJohn
    Jan 3, 2022 at 13:49
  • searches dusty old boxes for my "Whip Inflation Now" button
    – Harper - Reinstate Monica
    Jan 3, 2022 at 19:04
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U.S. centric answer:

As of November 2021, the inflation rate was 6.8%.

Current money market yield is about half a percent with banks paying even less.

The current 10 Year Treasury Rate is about 1.50%.

Investment grade bonds aren't much higher than that.

Cash is currently losing value because of inflation.

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  • All true facts, but OP is asking about a much longer term than just the current snapshot.
    – JTP - Apologise to Monica ♦
    Jan 2, 2022 at 17:43
  • Gotcha. The US inflation rate from 2017 through 2020 averaged 1.90%. Bank and MM deposits came nowhere near covering that. And while it's merely anecdotal, the cost of an awful lot of the things that I paid for in that time period far, far exceeded 1.90%. And while I'm not recommending them, some annuities will pay over 5% for life, covering a higher inflation rate.
    – Bob Baerker
    Jan 2, 2022 at 17:49
  • Hard to imagine any interest rate from a bank will match any inflation rate. that is why I am 90 % in equities.
    – blacksmith37
    Jan 2, 2022 at 19:06
  • @BobBaerker "some annuities" - right off the bat, annuities are an investing nightmare, and have no place in a retirement account - just ask Suze Orman if you dare lol. Annuities are complex investments designed to appeal to skittish investors, behind the curtain they are just "in the stock market" again, with the bank stealing most of the customer's gains, in exachange for a little insurance.
    – Harper - Reinstate Monica
    Jan 2, 2022 at 20:51
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    @Aganju too bad they only allow $10K in direct purchases per year.
    – RonJohn
    Jan 3, 2022 at 13:46

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