Is there anywhere to put a portion of a monthly pension (VA disability benefits) that is safer than cash?
My spouse and I both receive VA disability benefits, but I worry about changes in government and inflation. Some of our money goes to the our investment portfolio, real estate, money markets, etc, but is there anything that's actually safer than a good-ole savings account/envelope under the mattress for in case the world ends? Are gold krugerrands my best bet for the apocalypse?
Answers ( 2 )
Safety is a funny word in finance. Because of inflation, you can't really just stash your cash under your mattress for next year -- when you come back to get it, it doesn't buy as much food as it did the year before. It's as if some of the money just evaporated. It wasn't as "safe" as you thought (even putting aside the possibility of it catching fire or being eaten by a mouse or something).
So even if you aren't trying to find the next Tesla stock that's going to quadruple in six months, you are wise to consider the effects of inflation and wonder what to do to counteract it. What can you buy with your money that is certain to be worth more at some point in the future than it was when you bought it? That's still a little fraught with uncertainty -- how long a period of time are we talking about? A month? A year, or ten, or thirty?
Let's start with gold, your first suggestion. Gold is the standard answer to questions like this, historically -- but the price of gold has fluctuated all over the place recently (that is, the last 100 years):
https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart
So, that's out. There's no intrinsic value to gold -- it's just a shiny metal that people like to pay a lot of money for, but it doesn't add value to the world. The amount that people will pay for it varies all the time, though, so it's not a reliable hedge against inflation.
What about stocks? Good luck picking any one stock -- that's a fool's errand. We all (well, with the exception of CEOs and their billionaire friends, maybe) don't have the information needed to correctly ascertain which stocks are going to outperform the others. Historically, even mutual fund managers do worse than average at trying to "beat the market". Huh. But is the market at least able to stay ahead of inflation? For the most part, yes:
https://www.macrotrends.net/2324/sp-500-historical-chart-data
Better, but still not consistently. This graph shows that US stocks have beaten inflation over any 30-year span you want to measure. That's progress! And it's even better than that, because stocks represent companies, and companies do contribute wealth to the world -- so there's reason to believe that they'll continue to do so and their rise in price isn't just speculation. They also give dividends to their stockholders, which makes their value even higher -- if you include that, the longest span where an S&P 500 stock fund fails to beat inflation is about 19 years (1963-1982). But what about shorter-term considerations? Is there anything that has an unbeaten record over ten years?
How about real estate? That's trickier to consider, because the investment in real estate isn't like buying an ETF of stocks or a gold coin. They're very illiquid investments -- it's hard to get the money into real estate, and then it's hard to get the money back out again. And if we're talking about your house, it's usually a leveraged investment (because typically home owners make down payments and carry debt in the form of mortgages -- so if the price of the home goes up a little, their equity of the home goes up a lot -- but the reverse is also true and they can go completely broke or even end up with a home worth less than their debt owed on it).
What about bonds? Surely they can beat inflation, right? Wrong. Bonds are certainly less volatile than stocks, but they don't always beat inflation. But if your risk tolerance is quite low and you're mostly concerned about not losing too much, then it's a pretty good idea -- but rates of return for bond fund don't jump higher very quickly when inflation spikes like it did in the early 1980s -- so you're stuck earning lower interest rates and still losing to inflation.
How about TIPS? Treasury-Inflation-Protected-Securities. C'mon, that HAS to work, right? Yeah, about that:
https://fred.stlouisfed.org/series/DFII5
So the thing abou this is that it's MUCH less volatile compared to inflation -- it's basically right on the number, within a few percent. In fact, the last ten years have been about the worst ten years in the history of TIPS and they're only about 1% per year worse than the rate of inflation. That's better than putting it under a mattress and far less risky than stocks or bonds.
And money market funds are sort of a non-starter -- the interest rates for them (and savings accounts at banks) are so low that they're simply guaranteed to lose to inflation (unless there's a huge recession and the economy is deflationary -- that's actually really bad news, but that's a dicsussion for another Sage answer). There's not much reason to choose a money market over something like TIPS (except that you can get to your money very quickly). You're basically just giving away interest.
Finally, I like to end answers like this with "What advice would I give to my own mother?" I like to balance risk and reward, appropriate for the age of the investor. My mom is 75 and living on Social Security, but has saved up a modest amount over the years. I have her invest it in Vanguard's VTINX fund -- the Vanguard Target Retirement Income Fund. It's a blend of stocks, bonds, TIPS, and fixed-income securities, based in both the United States and around the world. It's pretty darn stable, but still beats inflation with a stick (over the long run) -- by about 3% per year. And while it does drop in value when the stock market does -- it dropped 22% in 2008-9 as the S&P 500 was shedding 56% of its value -- it recovers much more quickly. The S&P 500 reached its prior high in March of 2013, but VTINX got back by September 2010.
So that's my general advice. There are other considerations to be made if you chose VTINX -- would you want to do so in a 401(k) or Roth IRA or something else, for example. If you'd like a more detailed response that's specific to your situation, consider a private Sage question.
I would say safe = risk tolerance. I would have some cash on hand for those unexpected expenses (less than $1k) but have an emergency fund put into either a savings account or money market fund at a local credit union. Your emergency fund should equal 3-6 months of your monthly expenses. At the end of the day, this emergency fund is like an insurance policy and you'll rest easier at night with it being there.
Happy to discuss more if you like.