The WAY to WOW Shows
Risk You Can’t See: Inflation, Taxes & Silent Wealth Erosion
October 21, 2026
Automatically generated from YouTube captions; names and wording may contain errors.

[0:04] Not every financial loss shows us shows up as a red number on your statement. Your account balance can rise year after year while inflation, taxes, and other hidden costs quietly reduce what money can actually buy.

[0:22] >> [music]

[0:23] >> Who are you? And where are you going? What do you want?

[0:38] >> Hello and welcome to people making money. I'm your host Kevin Demille and I'm here every Wednesday. I think about what day it is. Every Wednesday at 10:00 a.m. Pacific time to talk about job hunting and becoming an employee or being an employee, I should say, starting and running a business and building wealth, the whole financial side of our lives. And I'm been I've been teasing this a little bit for the last couple of weeks, but the format of this show is going to change as of November. And so

[1:14] I invite you to stay tuned for that. For those of you who watched the Money in Motion mini-series that I did earlier this year, my co-hosts on that series, John Rubino and JC Clark, are going to be joining me permanently on people making money and that way you're going to be you'll get three perspectives from the guests that we have. So we're going to be switching also to an all guest format. So I hope you'll look forward to that. I know I know I'm excited about it. And so

[1:49] this is going to be one of the last of the people making money episodes with just me talking. So and along those lines, today's show is wrapping up the repertoire that I've been doing that so far this year of those three subjects. I'm going to be talking about a wealth-building topic, and that is risk you can't see, inflation, taxes, and silent wealth erosion. I teased that right before the intro. So, the bottom line is is not losing money

[2:26] is not the same as preserving wealth. And and this is, I think, one of the most important concepts we need to grasp uh because it is somewhat hidden unless we're looking for it, and it it's complicated. It's it's it's it's has a lot of different facets to it, and so we need to be able to grasp them, you know, holistically in order to understand where we are. So, there's a misconception that as long as my account balance isn't declining, I'm not losing

[3:03] money. But, that actually is not the case. So, to have that perspective is to misunderstand what it means to preserve and build wealth. And that's that's really what matters. So, should we measure wealth in dollars, or should we measure it in dollar-based purchasing power? And I would argue that it's the latter that is more relevant because it it you know, if you have $1,000

[3:38] uh and today it will buy uh you know, I'm trying to think of something I can buy for $1,000. It'll buy an iPhone, right? And 10 years from now you still you get a you have another $1,000, but 10 years from now it will only buy, you know, three quarters of an iPhone. So, you the the money has not maintained its purchasing power, and therefore you've actually lost ground in terms of wealth. So, uh can an investment increase in value while its owner actually becomes poorer?

[4:16] And the answer to that is yes. So, if a if a if an investment returns, let's say a a 5% returns. Let's say you invest a thousand dollars for a year, you get a 5% return, and so now at the end of the year you have a thousand fifty dollars. Now, that invest that income is taxable. So, let's say you're going to lose a quarter of it to taxes, okay? So, the fifty dollars is now thirty-seven fifty, and let's say and then we also have to adjust for

[4:51] inflation. Let's say inflation is 4%. I know it's a little bit less than that, but just in round numbers it's 4%. So, over a year a thousand dollars has lost forty dollars in value. So, although you made fifty dollars on the investment between taxes and inflation, you actually lost two dollars and fifty cents. So, that your account balance says a thousand fifty, but your purchasings purchasing power is nine hundred ninety-eight nine hundred ninety-seven dollars and fifty cents, right? So, this is this is what we have

[5:27] to understand is just because we're making a return doesn't mean that we're building wealth. So, um it's it's a natural thing to measure wealth in the based on the increase in nominal dollars. So, if a if if a hundred thousand dollars becomes a hundred three thousand dollars, it it's it seems okay, I made three thousand dollars, you know, great. But, as I just gave in that example, just because we made a three percent return, uh doesn't mean that we've we're actually building wealth. Um in in today's uh inflation

[6:05] environment, to get a three percent return on an investment means we are actually losing ground because inflation was reported this week at three point seven percent on an annualized basis. Now, having said that, okay, as I as I used to explain when I was doing my economic echoes uh episodes last year, the CPI doesn't necessarily reflect how any individual experiences inflation. Okay, so for example, the CPI includes the increase in the cost of buying a

[6:41] car. But, if we didn't buy a car in that period, then that portion of the CPI is irrelevant. Um it reflects uh you know, the the uh increase in the cost of gasoline. Now, for people who have to drive a lot, that then if gasoline prices go up, it's going to affect them more than would be reflected in the CPI than if they're someone like me, I don't drive very much at all. And so, if the price of gasoline goes up, the the increase in the CPI is

[7:16] probably higher at least with respect to that aspect than I actually experienced, right? So, we use the CPI as kind of a rule of thumb to how inflation is impacting our purchasing power. But, it's it's not accurate to our individual circumstances, okay? So, we do need to keep that in mind, you know. Nonetheless, it would be, you know, it it would be unusual if the CPI goes up by 3% that, you know, our our purchasing power actually increase, for example.

[7:52] That's probably not going to be the case. Our purchasing power may have only decreased by, you know, 2% if the things that went up in the CPA uh the I'm sorry, if the things that went up that caused the CPI to go up a lot were in categories where we don't have expenses. Um but it you know, it's probably not going to be so far off that, you know, again, the CPI goes up, but we actually increased our purchasing power. That probably is not going to happen, right? So, we want to distinguish between nominal return and real return.

[8:30] >> [clears throat and cough]

[8:30] >> And that's that's again, that's going back to the example I gave of the 5% return. Our nominal return was 5%. Our actual re- or our our um our real return was negative .25%. Okay? That's and that the the the real return takes into account the effects of price increases and taxes. Okay. So, um the the important question isn't did my money grow? It's did my money grow

[9:06] faster than the forces that are reducing its value. And and it's on that that we need to focus. So, let's let's take a you know, a sort of a typical investor, we'll call him. We'll um we'll we'll name him uh David, like it says here in my notes, so I don't start call I was I was tempted to call the typical investor Effie because I've been doing a lot of work with chat GPT recently and they have this new thing called Dot, which is sort of your chat GPT concierge. And the first time I

[9:43] used Dot, it asked me what I should what I wanted to call it. I said, um, "How about Effie?" And and the the the AI responded by saying, "You mean like Effie Perine, uh, Sam Spade's secretary?" And I said, "Yeah, exactly." He said, "Yeah, I like that." Of course, it was going to like any name I chose. But anyway, um, so let's take a you know, a typical investor, David. He's accumulated a million dollars, okay? And David considers himself a prudent, conservative investor. And so after decades of building his wealth,

[10:19] his primary goal uh, is to not lose it, right? And that that's again, that's very typical. So, he puts much of his investment uh, capital in what he regards as safe investments. And at the end of the year, he looks at his statement and the balance is higher. But, um, what did what Da- David didn't take into account is what happened with his actual purchasing power, okay? And so that's that's going to be the the the theme for this show, right? How does

[10:54] David more accurately assess what's happening to his wealth, right? So, a stable or growing account doesn't mean stable or growing wealth. Those are two different things. Okay. N- next, uh, or I should say, you know, misconception number two, right? Inflation only matters when prices are rising unusually fast, okay? So, um, what does modest conf- modest inflation do when compounded over many

[11:30] years, okay? So, what can inflation when can sorry, why can inflation be particularly important for retirees or long-term investors? And also, what happens when income doesn't increase as quickly as expenses? So, let's take a situation let's let's just say for the sake of discussion that inflation was currently at the Federal Reserve Bank's target of 2%. Okay? That's that is by any measure a

[12:07] low inflation rate. It certainly is an exception acceptable inflation rate according to the Fed. Over 10 years, okay? The 2% annual inflation rate will compound to a 22% increase in the cost of living. Meaning in essence that a dollar has lost over a fifth of its purchasing power, right? That's just at a 2% inflation rate. If

[12:44] it were 3%, it would be even more so, okay? Because because of the compounding effect. So,

[12:52] >> [clears throat]

[12:52] >> uh in you know, we tend to notice in inflation when it's high and prices jump dramatically, but even low-level inflation is eroding our buying power, okay? So,

[13:09] >> [clears throat]

[13:10] >> whether it's housing, health care, food, transportation, insurance, travel, all of these typically become more expensive over time. And so, we we we have to keep that in mind when we're looking at our investments, when we're making decisions about into what types of investments we are going to place our money. And and this is particularly true for uh for people you know, for seniors. I I guess that includes me, although I'm still working, have no plans to stop,

[13:45] right? But if if someone is living on essentially a fixed income, right? Uh um inflation is going to erode the buying power of that fixed income. Okay? And especially since people are living much longer than they used to, right? So, when Social Security was created uh back in the uh I think it was late 1930s, uh it you know, people's life expectancy um beyond 65 was relatively short. Now, a

[14:20] lot of people live into their 80s and 90s, and it's predicted that a third of people or 30% of people born around now are going to live into their hundreds. Not [snorts] like 120s or 30s, but like they'll be 101, 102, that kind of thing, right? So, to retire at 65, you could easily have you know, 15, 25, even 35 years of living left, okay? So, how inflation um and taxes erode wealth is particularly important

[14:57] for someone who want who's planning to stop working at some point to have what we might call a traditional retirement. So,

[15:06] >> [clears throat]

[15:07] >> when we talk about safe, we we cannot mean merely avoiding volatility, which is typically what people mean when they say, "Well, I want a safe investment." What they mean is they want an investment where they're not going to see the the asset value of the investment fluctuating. It's purchasing power really needs to be considered as part of that risk assessment equation, right? So, let's say David receives $40,000 a year from the, you know, return on his million-dollar portfolio. So, initially,

[15:44] along with his other income, $40,000 return on his portfolio is good. But, uh and especially and, you know, since he's maintaining his million-dollar asset value. But, you know, 10 years later, groceries cost more, insurance costs more, home repairs cost more. Um if he doesn't own his home, rent costs more, right? So, the income hasn't disappeared, but his purchasing power has. And so, David begins to starts to begin to under- starts to begin Listen to me. He begins to understand that inflation, um

[16:23] didn't um it didn't remove the money from his account, um it just lessened what he can buy, right? And its erosive because its erosive effect is slow, he may not have noticed it in the beginning, but over time it becomes a bigger and bigger issue. Okay. Next, uh three. If my investment earns 6%, I made 6%. Well, that may be if you're invested in something like, you know, tax-free municipal bonds. Okay, so maybe your

[16:59] after-tax return and your actual return are the same because the income from tax-free, right, municipal bonds is zero. But, most investment returns are taxable. Now, not all types of returns are taxable every year. So, capital gains are at least right now are not taxable until the gains are realized, which typically means the property is sold or the investment, I should say, is sold. But, income generated each year is taxable,

[17:36] right? And you get a 1099 of one sort or another, usually from whoever is is holding the investment or you may get a K-1, okay? And that income must be reported on your income tax return. And it's going to be subject to taxation at whatever your marginal tax rate is. So, here in California, um where we pay both federal and the highest state income tax in the country, right? So, even if our

[18:11] our federal income tax rate is only 15%, uh the California the top California rate kicks in at a very low dollar amount. And so, you're going to be paying around 11%. So, the combined rate of taxes is 26% at that point. So, you're losing a quarter of your return just to income taxes, right? So, in effect, a 6 and 1/2% return pre-tax is a 4 and 1/2% return after tax at least here in California. Now, if you're living in a

[18:47] state like uh Florida that has no income tax, so you so state income tax is not going to erode your return, okay? And so, uh in instead of um your rate of return dropping from 6% to 4 and 1/2% the way it would here in California, it may only drop to say 5% okay? So where you live makes a big difference, right? So the the the question then is how much do you actually keep, right? And and what

[19:24] matters more, the stated return or the after-tax return? And I would argue you need to look at both, but in the final analysis, what you keep is really what's relevant, the after-tax return, right? And so what happens when inflation and taxes operate simultaneously, that goes back to the example I gave of a thousand dollars with a 5% return where here in California, um where both the income tax rates and the inflation rates are higher than they are in other states in the union, you can get a 5% return on an investment and

[20:00] you can you can actually have a nom- I should say a 5% nominal return on your investment, but between taxes and inflation you've actually lost ground in terms of purchasing power. So when you look at the sort of headline investment return on something in uh that that you're, you know, considering you need to look at the after-tax return as well. Now people promoting investments, generally speaking, are not going to state an after-tax return because that will be different for each uh potential

[20:36] investor, right? And so we need to learn how to do this ourselves or we need to consult with our tax advisor, our accountant to get a handle on what that may be, right? So

[20:50] >> [clears throat]

[20:51] >> you know, on a small investment, okay, it may not matter so much, but in on any kind of sizable investment um you know, you are well advised to talk with your financial advisor and your accountant to understand this difference between pre and after-tax return, right? But even after But even after taking into account the taxes, um there are other things that can in fact can affect in fact too, I suppose, affect your your real return, and that is inflation and also the costs of the

[21:28] investment. So, those all have to be uh examined. Okay, so David considers um that he's getting what he's getting is an respectable return, right? Um and he and and he thinks, "God, look, I I I make money, right?" But then he pays taxes on that income, and he considers, you know, he he looks at, "Well, out of that return, I actually had to pay some costs, and then I had to pay taxes, and then, looking at inflation, oops, I didn't actually make any money, or my return is much smaller than I thought it

[22:04] was going to be, right?" So, all these factors need to be examined. Let's take a quick break.

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[22:56] >> Okay. Let's look then at misconception number four. Uh the safest strategy is one where my account fluctuates the least, right? But being conservative can be a form of risk. So, is volatility itself the same thing as risk? That's a good question for us to ask ourselves. Can avoiding short-term fluctuations create even greater long-term risk? And finally, what are you actually trying to

[23:33] protect? The dollar amount or its purchasing power? And again, I would argue protecting purchasing power is far more important than protecting the straight, you know, dollar amount of an investment. So, in investors commonly, as I mentioned before, associate risk with visible price movements, right? So, look, it's easy to see if an investment falls in value from $100 to $90, that loss is obvious. But purchasing power erosion is different, right? So, a statement may

[24:10] show um you know, a $100 in $100 investment maintained its $100 value or even, you know, it made a couple of percent return, $102,000 $102 now. Um but that amount of money actually declines on a purchasing power basis. So, what we need to do is look at silent risks, which psychologically are easy to easier to ignore, but they have to be assessed. And so, we we need to force ourselves to look at these other types

[24:45] of risk. So, besides the ones we've already mentioned, like inflation risk and volatility, there's market risk, there's interest rate risk, there's tax risk, which we've also uh discussed at least in terms of what tax does to erode return. Of course, there's also task tax risk in terms of if you're doing something that maybe is risky from an uh you know, an audit standpoint, that sort of thing, right? Liquidity risk, concentration risk, longevity risk. All of these need to be

[25:21] examined together because the reality is if if if you optimize a port- your portfolio to avoid volatility risk, that doesn't mean you're avoiding risk. What you're doing is you're shifting the risk into other categories. And so, a more informed decision is one where you assess the different types of risk and then decide which ones are you willing to tolerate in order to reach your goals, right? So,

[25:58] I I know I gave what? Two, four, six, eight, eight different types of risk. Now, in the end, you may decide, you know, the one that keeps me up at night the most is volatility risk, so I am going to take on these other risks rather than have volatility in my portfolio in order to be able to sleep well. But, maybe things like tax risk, liquidity risk, longevity risk actually loom larger, and so you're willing to take some extra

[26:33] volatility risk in order to reduce these risks in other categories, right? So, um David, our investor, becomes increasingly uncomfortable with market fluctuations, and so he moves even more of his investments into uh relatively stable nominal returning type investments. So, his statements become calmer in the sense that the asset value, you know, stays, you know, becomes, you know, does not uh fluctuate

[27:08] as much. But, what he doesn't realize is he's probably giving up return in order to to get that redu- reduced volatility. And so, now he has a he's he's subjected to greater inflation risk, uh greater tax risk, uh maybe greater concentration risk. And so, he's actually made his portfolio riskier. He hasn't reduced his risk while at the same time thinking he's seeking greater safety. Right? So, the

[27:43] absence of volatility is not the absence of risk. It's just the absence of volatility one type of risk. Okay, finally, number five. Once I've accumulated enough money, wealth management is mostly about protecting the principal, right? So, wealth prevention uh wealth preservation requires measuring more than just do I have the same amount of money today that I had when I started investing, right? So, again, this is the question I've

[28:18] been asking on all these. What are we we really trying to preserve? Okay? Is it the same asset value 10, 20, 30 years from now, or is it purchasing power 10, 20, 30 years from now? A- If it's the latter, that is a smarter way to be looking at your investments because in the end, you're more likely to be gratified with your investments if they are meeting the goal of supporting your lifestyle, than if you've had relatively

[28:53] um smooth sailing with your investments, but now you can't afford to live the way you want to live, right? So, are your assets, your investments actually structured for what you're trying to accomplish, right? So, effective wealth preservation begins with defining the objective, and you can tell right away if you're dealing with an astute wealth advisor or financial advisor, if they start out by asking you questions about what you want to accomplish. If they immediately start

[29:28] talking about products, that's probably not a a financial advisor with whom you ought to work, right? So, instead of merely asking whether the portfolio grew, ask the following questions. Did purchasing power increase, right? What was the after-tax return? What were the expenses and fees incurred? Even on things like mutual funds, there are no-load mutual funds that have no fees, basically, but most mutual funds have some kind of load, and you and that that

[30:04] load is is uh what the sponsor of the mutual fund gets in fees, okay? Now, these days, there are more and more funds out there, especially um ETFs, that have little or no costs associated with them, and they can be very good. So, you need to talk to your financial advisor about these kinds of uh uh investments, and and how those fit into your tolerance for all those different types of risk that I mentioned in the last point, right? Okay. Um uh

[30:40] is your income keeping a pace with your living expenses, right? Is your portfolio diversified among different types of risk? In the end, that's the reason for diversification. We talk about diversification as an asset allocation issue. But the reason for allocating to different types of assets is often times they have different types of risks associated with them. And so what we're really doing is diversifying our risk to reduce it

[31:16] overall, right? Uh another issue to discuss is sufficient liquidity available. Okay, let's say you're coming up on a time where you're going to want to pay for your children to go to college. Well, you're going to need access to some cash, i.e. liquidity, right? Are your investments planned with that kind of timing in mind? And finally, is the investment structure tax efficient for your specific circumstances, okay? There's no such thing as a typical investor when it comes to tax planning.

[31:52] That needs to be done for you individual. So, it's you know, effective planning is really about maintaining uh the financial resources you need to accomplish your financial goals. And finally, that dawns on David that that's what he needs to do. And so, instead of beginning with, you know, how much money do I have, uh he begins asking, "What can my money buy? And will it continue to be able to buy that in the future?"

[32:27] Once he starts looking at his investments from that perspective, he's much more likely to be able to meet his financial goals while at the same time minimizing the the broader risk spectrum while accomplishing that. Okay, so true wealth preservation is not about preserving dollars. It's about preserving what those dollars will allow you to do. So some closing thoughts. Some of the

[33:03] most dangerous fi financial risks are easy to identify. A stock falls, a business fails, property loses value. Okay, you know, you know, maybe the property lost value because of a change in the market. You had no control over that, but you can still see the market risk the market risk's impact on your investment. But silent wealth erosion works differently, right? So your account can increase, your income can continue, and yet and your

[33:38] investments can appear stable, and yet after inflation, taxes, fees, costs, and just the passage of time your the value of your investments and and the purchasing power of the income they generate can decline, and you can actually be getting a negative return on your investments. So that's why the most important question in wealth management isn't how much money did I make? It's how much more or less can my money buy? So I'm curious to know how you approach

[34:16] this issue of um the silent loss of wealth. And you know, look down below, you you'll see links to social media. Um would love to hear your thoughts on that topic. Happy to comment. So uh let's see, schedule of shows Mondays at 10:00 a.m. Pacific time. Trust and Estates weekly. By the way, these are all West Coast time or Pacific time. Tuesdays at 10:00 a.m. business lessons from the military. Wednesdays, like today, at 10:00 a.m. people making money. And every other Thursday at 5:00

[34:54] p.m. join me at Jigger's Place for a cocktail and a schmooze and we'll talk about all those things that make life worth living. Relationships, books, movies, ideas, all those kind of things. So, I thank you very much for joining me today. If you're watching me on YouTube, Spotify, or Apple podcast and you're not a subscriber, I sure would appreciate it if you would consider becoming one and that way you won't miss any upcoming episode. So again, thanks so much for joining me. Wishing you a wonderful rest of the day and signing off as I always

[35:29] do, Marie Darling, you are my bell.