Effect of cost of living on savings

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$ depreciation has caused -ve wealth effect at time when real rates of return on US Treasuries are -ve. Do TIPS deliver?

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Effect of cost of living on savings

  1. 1. RISK MANAGEMENTHow do you measure the risk of your savings not meeting your retirement needs? October 29th 2012 www.gnostam.com
  2. 2. Price of Barrel of Oil
  3. 3. Chart of US Treasuries 5 yr
  4. 4. Recent Depreciation of US $—  How much value has $ lost since 2002? —  If had kept its “parity” with: —  Chinese Yuan: Gallon of petrol $3.10 vs. > $4.00; —  Euro: Gallon of petrol $2.90 vs. >$4.00; —  Yen: Gallon of petrol $ 2.75 vs. > $4.00; —  Swiss Franc: Gallon of petrol How much Gold a $ would by in Mg $2.50 vs. $4.00
  5. 5. One 1963 $ now worth 15.7¢
  6. 6. Real Return if invested in T Bills since 1950
  7. 7. Real returns after taxes –ve!
  8. 8. Have TIPS kept up with inflation?—  TIPS are US Treasuries that have their par value indexed to the Consumer Price index, while their coupon or interest remains fixed.—  Implied inflation rate, [yield of 30 year TIPS minus yield on T bond] has been rising steadily. On 29th October 2012 it stood at 2.51%, while 30 year yield was 2.88%, so slight +ve return—  But 10 year TIPS have a NEGATIVE return…. Or -0.76%.
  9. 9. Risk Management Solution—  You cannot rely on one asset class to protect yourself from savings erosion, [inflation and US $ depreciation];—  $ lost 3.56% per annum vs. Swiss Franc from 1/1/2004. Bonds returned approximately 4.95% pre tax. If paid 25% tax and fees, then the return would have been equal to inflation, and took more risk as duration approx 4-5 years, and included non AAA rated bonds;—  Solution diversify with care….. It works, if you have a good idea of our risky environment and can develop …….. A STRATEGY FOR YOURSELF!
  10. 10. Thank you for your attention Gnostam LLC PO Box 960 Inverness, CA 94937 USA Tel: 206 384 0069   E-mail: pcorsano@gmail.com pcorsano@gnostam.com

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