Stocks and inflation protected I-Bonds.
Go to www.treasurydirect.gov and get yourself an inflation protected I-Bond account
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This is an interesting question... I had to think about it for a moment!
Inflation is really only a factor when your money is in cash, or other non-income generating commodities (cash, gold, real estate, etc). When you are investing your money and receiving income from it, as long as it is greater than 3% of the principal amount (on average), then you are staying ahead of inflation.
It seems to me, you might actually want to ask a better question: "If I am pulling money out of my investments every year, to purchase non-investment (depreciating) assets, how do I maintain my purchasing power of the principal above and beyond inflation?"
In this case, then yes... you have answered your own question.
If you have some other source of income, like a job, trust fund, etc... and have other means by which to pay your daily expenditures... then I would encourage you to reinvest the full $20,000 of income, and watch your principal grow at a much faster clip. Gaining interest upon interest, upon interest.
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not quite. saving and investing are different. Inflation of (to stick to your example) 3% means that if you buy a loaf of bread that cost $1, the next year, that loaf of bread will cost $1.03. If you saved your $1 the first year, the next year, you will still have that $1, but you will no longer be able to afford that loaf of bread.
What you want to do is invest your money in something that can grow your money. something that you SAVE your money in, and it grows interest, like in a bank or investment firm with stocks. If you are able to gain 3% on what you invested, then you are able to keep up with inflation. For example, if you had $1, and you put it in the bank that gives you 3% a year, at the end of the year, you will have $1.03.
What you are saying, is you have earned $20k from investment (which means you did not include the initial amount) If you were to save $600, (which is more like 33%) then great! You could also use that $600 to put back into your investment.
Keep in mind, although 3% has been the average the last 10 or so years (not including 2009-2011 or so), it isn't always at 3%.
http://www.usinflationcalculator.com/
So let's say the annual inflation rate is 3% and will stay that forever. You earn $20,000 (after taxes) from your annual investment income. Should you save $600 that year and continue doing that each year to maintain your purchasing power forever?
Is this how it works? It seems too simple.
