The global economy is limping along and there are as many justifications pointing to inflation as deflation. Deflation, a scenario of falling prices, may be seen in some locations such as the cost of homes, real estate, electronics and durable items. What's the impact on your retirement investment deflation happens more widely?
Most retirees don't have any job to lose. They're living off Social Security, pension programs and their retirement investment revenue. The majority of this retirement investment might be fixed income. Those in this kind of a circumstance may really benefit from deflation - mainly from the benefit of lower prices for items. Nevertheless, retirees spend a great deal on products, including health-related care, which frequently do not suffer from deflation. Yet several products, the price of gasoline for your car, air travel, hotel prices will drop making it possible for you to extend your holidays without greater cost. Your same fixed retirement investment all of a sudden can make you somewhat wealthier.
We're all familiar with the effects of inflation. Our dollars just do not buy as much as they used to. Too much 'easy money' from too much credit puts more money into everyone's fingers so each dollar is worth less than before. So a lot of dollars are chasing too few goods and also the costs of items are bid up. This is very unpleasant for somebody living on a retirement investment which is largely a fixed income as your dollars will not buy as much.
However when economic downturn accompanied by deflation happens, everyone becomes scared of consuming. Businesses feel the pinch and people lose jobs. Authorities might attempt to 'prime the pump' by offering and instigating low interest rates. That decreases the price of credit and preferably to get individuals to begin borrowing and 'consuming more'.
But if the turndown is just too severe, very few individuals will be tempted to spend money. The money supply in fact agreements. The results in a reduced demand to purchase most things and may push rates down. And deflation will be the general decrease in the costs of items. Your dollars worth more! A retirees dream when your retirement investment goes further!
But under deflation, dollars become much more precious and financial debt - i.e. having a fixed quantity of dollars - becomes more of a burden. Therefore retired people should reduce the expense of their debt. The good news is that many retired people have reduced financial debt levels and also have hopefully paid off the mortgage. If you have financial debt, pay off debt faster. As deflation sets in you are paying off debt in more expensive dollars. Therefore the quicker you can reduce your debt before a deflationary environment, the less pricey it'll be.
Restructure your financial debt payments. With economic downturn and deflation comes dropping interest rates. Make use of reduced rates of interest to rebuild debt payments you can't repay rapidly. At the writing of this post in April 2011, deflationary forces have pushed mortgage rates down to 3.25% - quite a chance to cut back the quantity of retirement income allotted to housing expenses.
During deflation, the worth of money is increasing and keeping it will improve your wealth. Aside from preserving your crisis funds, you'll want to maintain dollars for investment possibilities at low prices.
If you do have additional cash, stay aware of overly depressed investment prices which will restore soon after the recession ends. Real estate investments - particularly condo properties - are a typical case. It might even be worth a little remortgage of your paid off home for several investments (this technique isn't ideal for everybody as any borrowing will incur a set payment commitment while the return on investments is not assured).
So while deflation isn't good for all, the net impact is quite advantageous for somebody who has a fixed retirement investment along with a reduced or no-debt situation.