Another important factor to consider in the context of your investments is the role of inflation.
In June 1975, when Steve Jobs and Steve Wozniak invented the Apple computer, actual apples cost around $0.34/lb. In September 2015, apples cost approximately $1.30/lb. – a 382% increase. That’s a fairly typical example of inflation, which, over the past forty years, has cumulatively totaled 343%. This means that if you had kept money under your mattress from 1975-2015, you would have experienced a loss of buying power of 343%.
Since the 2008 financial meltdown, Americans have benefited from a relatively low rate of inflation: approximately 1.5% per year. However, considering the vast quantity of money printed (known as “Quantitative Easing”) by the federal government since 2008, it is inevitable that inflation will make a resounding, and most unwelcome, return. Historically, assuming a 3% annual rate of inflation has been a good rule of thumb. Your investment advisor should strive to provide returns that exceed the benchmark index as well as the rate of inflation. That’s why stuffing money under your mattress is a poor financial strategy. Even if you don’t touch it, you’re losing approximately 3% in spending power every year.
Back when savings-account-interest rates were above 3%, banks could, at least, protect your nest egg from inflation. But since 2008, the federal Reserve has kept interest rates artificially low; the average savings account now pays interest at an annual rate south of 0.2% — only nominally higher than your mattress. That’s why even the most risk-averse investor has to be well-informed about financial planning, in general, and retirement planning, in particular.