The Hidden Tax: How Inflation Erodes Your Wealth Over Time

By: Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, CRPS®, CMFC®, AWMA®

Resistance to taxes like those imposed by the Stamp Act and Tea Act played a crucial role in shaping our nation’s beginnings. Today, we navigate a much more complex and pervasive tax landscape that touches nearly every aspect of our financial lives. We’re taxed on our earnings, spending, savings, and even on the passing on of our wealth. This constant cycle of taxation is evident in everyday life, from registering your car and paying property taxes to covering sales taxes on your daily purchases. Yet, one of the most significant—and often overlooked—burdens on your finances is inflation.

Inflation is often called a "subtle tax" because it enables the government to increase the money supply by printing more dollars, typically during times of economic crisis or when there's a need to fund large deficits. This is done to stimulate the economy, finance government spending, or pay off debts when traditional revenue sources like raising taxes are insufficient or politically challenging to increase.

This increase in money circulation devalues each dollar, leading to higher prices for goods and services. As a result, the public ultimately bears the cost of this additional government spending through a gradual loss of purchasing power. At its core, inflation happens when there’s too much money in the economy and not enough goods and services to match it, causing prices to rise. The following table provides a snapshot of average inflation rates by decade, illustrating how inflation has varied over time and its impact on the cost of living.

The next table shows that even low levels of inflation over time can have a devastating effect on consumers' purchasing power, leading to a significant decline in what their money can buy. For instance, $1.00 in January 1960 is worth just $0.09 today (June 2024). Even more recent decades haven’t escaped this trend: since 2000, the dollar has lost about 46% of its value. This decline isn’t just a historical footnote—it’s a reality that continues to affect your wealth today.

The Erosion of Purchasing Power: A Historical View of Inflation’s Impact from 1960 to 2024

The implications of this decline are meaningful, especially in the context of retirement planning. Living longer, healthier lives is a blessing, but it also brings "longevity risk." The longer you live, the more your savings are subjected to the eroding effects of inflation. For example, from January 2020 through June 2024, inflation reduced the dollar's value by nearly 18%, and if history is any guide, the dollar's decline is likely to continue. Without strategic planning, there’s a risk that your investments may not be sufficient to sustain your standard of living over the long term.

Moreover, inflation impacts everyone differently. While some sectors, like apparel and electronics, may see slower price increases or even declines, essential categories like medical expenses, housing, and food have consistently outpaced general inflation. This means that the impact of inflation could be even more pronounced for retirees, whose spending often skews toward healthcare, housing, and groceries.

At Century Management Financial Advisors, we understand that taxes and inflation can significantly challenge your financial plans. That’s why we are dedicated to working closely with you to develop strategies that seek to grow your wealth and help protect it against these ongoing risks. By addressing these factors, we focus on aligning your investment and retirement strategies with your overall financial goals, helping to provide the security needed for a long and fulfilling retirement.

Recognizing the impact of inflation on purchasing power is crucial for effective financial planning. As we have shown, even modest inflation can significantly affect your financial strategy over time, and our team is here to guide you through these complexities. If you have any questions or would like to discuss your plan or investment strategies further, please reach out to us. We are dedicated to helping you make informed decisions that protect and enhance your financial future.

Disclosures:

Century Management ("CM") is an independently registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Century Management is also registered as a Portfolio Manager in the Province of Ontario. This article is educational in nature and does not constitute investment advice. CM does not provide legal or tax advice; the information herein should not be considered legal or tax advice. A full description of our Firm’s business practices, including our Firm’s investment management services, wealth plans, and advisory fees, is supplied in our Form ADV Part 2A and/or Form CRS, which are available on request and also on centman.com. CM-2024-08-15