Early Retirement vs. Hyperinflation

Earlier this week, I met with my financial advisor to file my taxes for 2020. As is the case every year, he looked over my numbers and stated, “You’re well on your way to early retirement!”

It sure doesn’t feel that way.

On track by changing metrics

I currently have around 2.5x my annual income in retirement accounts, whereas the recommended target for my age is a little over 1x, the average is $32,500, and the median is $12,300. Last year, I contributed the maximum amount to my Roth IRA while dividends paid out an 3x that amount, thanks to 13 years of compounding interest.

I’m in a good place. I have worked hard and made sacrifices to get to where I am, but I’m doing well enough financially. My partner and I “live like paupers” according to my mother-in-law but, for us, extreme frugality is the cost of financial freedom.

I started saving early and aggressively thanks to the financial gurus housed at my local library, yet I still worry about future finances. The Federal Reserve just keeps printing money. Of all US money in circulation, 23.6% was printed last year and another 16.4% has been printing so far this year. That means that 40% of all dollars in existence created over the last 15 months. And each dollar out in wild is thus worth less.

The United States used to be on the gold standard, which directly links the U.S. Dollar to gold. In 1973, the United States completely did away with the gold standard and moved to a fiat money, which basically means that the dollar has value because the government says it does.

Hyperinflation as a threat to financial freedom

When planning for early retirement, I can’t helped but consider hyperinflation as a real threat to my financial future. I’ve been watching the phenomenon unfold in Venezuela and looked on in horror as the Bolivar reached 10,000,000% inflation, with an ongoing annual inflation rate of 2,436%. At that rate, a $2 gallon of milk would be sold for nearly $50 one year from now, and $1,218 two year from now.

I highly doubt that the United States will reach the level of hyperinflation we are seeing in South America, but my concerns are rising because I don’t see US wages rising in step with the devaluation of the US Dollar. Rumor had it that the American is planning to print more cash this year as part of another stimulus package, while will further devalue the cash you have sitting safely in your savings and investment accounts.

I have heard mumbling about returning to the gold standard, some say that cryptocurrencies like Bitcoin will take over, and then there is always the chance that the role of a global reserve currency is taken over by another currency like the Renminbi or even toilet paper.

History has shown us repeatedly that the average lifespan of a global reserve currency is about one hundred years, so the US Dollar may be nearing its expiration date.

What happens when the savings you have accumulated over several decades due to hard work, sacrifice, and continual research is suddenly worth near-nothing? Goods like food and other essentials become unaffordable for people, as wages tend to be more fixed or static than rapidly increasing factor prices. It also becomes much more expensive to operate any business that requires raw inputs.

Hedging against inflation

With the value of the Dollar on the decline, it can be helpful to consider other avenues for securing that value over the long term.

Since the start of the pandemic, the real estate market has been booming across the US. This is not only because people had the freedom to work remotely from anywhere, but also because prospective buyers recognized that housing is generally a secure and often appreciating store of value. My partner and I own our home and have seen its market value catapult far beyond what we would consider it worth, yet it be viewed as a generally more stable asset than the stock market with greater chance of appreciation that a high-yield savings account.

In addition to allocating stocks into US companies, it is important to diversify internationally. At first glance, it may seem unpatriotic, but if the US Dollar collapses or is devalued to a great extent, you will want to be able to lean on foreign countries that are still going strong. There are several major economies in the world that do not rise and fall in tandem with the U.S. market indices, such as Italy, Australia, and South Korea. Adding stocks from these or other similar countries can help to hedge your portfolio against domestic economic cycles.

It can be helpful to store commodities, such as precious metals or household goods. For over fifteen years, my partner has maintained a “Costco mini” in the guest room walk-in closet. At any given time, we have at least three-months worth of every household product we use. It’s a bit absurd, but we didn’t need to wait in line for or pay a premium on toilet paper during COVID-19 and we bought on sale and in bulk before prices rose, giving us a tiny advantage over the general population without contributing to the chaos.

Finally, bitcoin* is theoretically positioned as a hedge against this scenario, deriving its value from both speculative interest as a hedge ,as well as its deflationary and controlled money supply and its use as a potential primary means of exchange in a more digitally-oriented world economy. The 21 million bitcoin limit means that at a certain point, there should be less bitcoin available than its demand meaning that, in terms of value, the price per unit should increase as the supply decreases. I can see bitcoin and cryptocurrencies like it acting as a true and meaningful hedge against inflation — and the economics and policy thought that drive it.

Putting the pieces together

Hyperinflation doesn’t keep my up at night, but it is truly one of my greatest concerns as I look towards the future. With the proposal of student loan forgiveness, universal basic income, additional stimulus packages, and other costly initiatives, I can’t help but worry. For decades, the middle class has been shrinking and, with it, the prospect of home-ownership, higher education, starting a family, and full retirement seem to slip further and further out of reach for many.

When I brought up the reckless printing of money to my financial advisor during my tax session, he quoted the numbers himself and voiced his own concern. He looked and me and my partner and told us we were smart. We own our home, I have a globally diverse portfolio, and I have a solid start to my retirement funding. He’s still skeptical on cryptocurrencies, though I’m hoping to change his mind come next tax season.

Over the last year, we have reallocated funds from diversified safe but dismal US state and country bonds into bitcoin*, and I have begun dollar cost averaging small amounts into bitcoin and other heavily-researched alt-coins. We’ve expanded our “at-home Costco” from a three-month supply to six months. With the high demand for ammo, we sold our extra for tenfold our purchasing price.

Early retirement vs. hyperinflation

If the US Dollar follows the extreme path of the Venezuelan Bolivar, the $2,000,000 I am on target to retire early with will be worth a measly $0.02.

At the end of the day, I think I’m doing the best that I can to prepare for all imaginable possible future scenarios. My hope is that, whether the Dollar collapses or hits new all time highs, my assets will be widely diversified enough that I will still come out ahead. If bitcoin takes off, I will have enough invested to benefit. If that US economy collapses and China becomes the new world superpower, my money will still grow due to international diversification. If all currencies fail, I’ll still have a roof over my head and a closet filled with daily essentials.

Do you worry about hyperinflation, or am I utterly alone in my silent panic? What are you doing to hedge against devaluation of fiat currency? Or is this something you’ve never considered and I’ve now given you one more thing to worry about?

*Disclaimer: Cryptocurrency is high risk, high reward. Don’t invest money you can’t afford to lose. I am not a financial advisor and nothing here is financial advice. Do your own research.