Have you ever been tempted to ignore a dripping faucet? Just a drop here and there doesn’t look like much, but leave it long enough and you’ve got water damage.
Inflation works the same way. Ignoring it is like letting a faucet drip in the basement—easy to overlook in the short term and likely to cause real damage over time. The slow but steady leaking away of purchasing power can soak through your savings if you’re not paying attention.
A relatively modest inflation rate of 2% or 3% shrinks the value of a dollar by 20% to 26% over ten years. A higher rate reduces the dollar’s purchasing power even more dramatically. This is the case even when the inflation increase, like the post-pandemic spike in 2022, is relatively brief. Inflation may drop back to previous levels, but prices don’t go down accordingly. Instead, they go back to rising at a slower pace.
What kind of maintenance does it take to prevent inflation leakage? Here are a few suggestions.
First, understand the appropriate role for cash in your investment portfolio. I sometimes hear people say, “I’ll just hold cash until things feel more certain.” The problem is that certainty has a price. From a behavioral perspective, it’s easy to understand why people cling to cash. It feels solid and safe. You can see the balance in your account, and it doesn’t bounce around like the stock market. Yet that sense of safety can be deceptive. Relying on cash may help us avoid the discomfort of volatility. But the price of that comfort is the hidden damage of allowing inflation to drain our purchasing power.
Instead, right-size your cash according to your particular needs. It’s a good idea to keep three to six months of essential expenses in a savings or money market account. You may want more than this if your income is uncertain or you are withdrawing investment funds for retirement living expenses. A financial advisor can help you establish the right amount for your emergency reservoir. Beyond that, cash sitting in an account is water slipping down the drain.
Second, match money to time. If you will need funds in one to three years for such expenses as tuition, a remodel, or a car, short-term bonds or CDs are a good fit. A ladder of short-term Treasuries or CDs can give you both safety and a bit of return. For three to seven years, a blend of bonds with some conservative stock exposure can work. For goals beyond seven years, lean more toward equities. In the long term, diversified stock exposure remains one of the best ways to stay ahead of inflation.
Third, consider some inflation-aware tools. Treasury Inflation-Protected Securities (TIPS) and I Bonds can help guard against inflation, though they’re not stand-alone solutions. Think of them as extra sealant around your financial plumbing, not a whole new system.
Finally, keep your spending plan realistic. Even when inflation is quiet, build in regular small cost-of-living increases. If you are retired, revisit your withdrawal rates to make sure they account for both returns and inflation. Sometimes the best way to avoid a financial leak is as simple as tightening the faucet—spending a little less or delaying a major purchase until income and markets catch up.
Inflation is a quiet seeping in the background that you may not notice today. Yet over years it can drain value from your retirement reservoir. The fix doesn’t require a full remodel, just regular maintenance: right-sizing cash, aligning investments with time horizons, and reviewing your plan regularly. Tending to those small leaks can help prevent having to mop up regret later.
Note: The information provided is for educational purposes only and should not be construed as investment advice or a recommendation to invest in any particular asset class or strategy. Investing in cash or cash-equivalent securities involves risks, including inflation risk, reinvestment risk, and the potential for lower returns compared to other investments. The views expressed are subject to change based on market or economic conditions. Past performance is not indicative of future results. Any references to potential benefits or characteristics of cash as an asset class are illustrative and may not apply to your individual circumstances. You should consult with your financial adviser before making any investment decisions.