Common Cents: How to make inflation your ally in retirement

In 2005, my pregnant wife and I moved to California with high hopes. High home prices dashed many of those hopes. We checked home prices daily, but our income was too low, and we didn't have much, if any, of a down payment.

We decided to give it some time.

We began to save for a down payment. Saving seemed fruitless because home prices seemed to climb faster than we could save, but we kept going. Then, something happened that few saw coming.

The credit crisis in 2009 caused home prices to plummet. Some areas saw home prices get cut in half. To boost the economy, the Federal Reserve cut interest rates, which in turn led to a drop in mortgage rates. These two things created an environment in which we could afford to buy a home.

I don't know what is coming for the home market, but things are tougher now than they were in 2007. Not only do homes cost more, but interest rates are far higher. Most young couples can't afford a home here, which is why school enrollment is declining in our valley.

As the wine industry slows, there may be a potential for families to stay. I wouldn't expect a major housing correction. The 2008 and 2009 financial crisis was primarily caused by the resetting of millions of subprime loans; today, many homebuyers are sitting on very affordable 30-year fixed mortgages at rates of 3% and below.

The lesson of our current economy is that inflation needs to be taken seriously, yet it often is not. Investors are always mindful of the significant market drops, but few consider the long-term effects of inflation.

Stocks and residential real estate are fantastic inflation-beating tools.

Inflation has slowed, but the effects of inflation from the last few years remain very much present in our lives. Food, gas, and home prices, among other things, are costly. High prices and high interest rates make it impossible for many young people to buy a home.

Investing in stocks does carry risk. There always seems to be a drop or some announcement that shakes confidence, but time and time again, stocks rebound.

Real estate also carries some risk, especially when we own our homes. Things break and wear out. Some of that wear and tear is expensive. Roofs, paint, and carpeting can be costly.

Despite all the risks, real estate and inflation have thrived in this high-inflation market, as they usually do. No matter how much you dislike risk, you need to take a little.

If you are currently frustrated at the insane difficulty of buying a home, don't give up. Interest rates can change, and so can markets. There will be a massive number of homes that will change hands in the next 30 years as baby boomers retire and pass away.

If you are planning for retirement or have already passed through those doors, don't be afraid to invest at least a small percentage in the stock market. A portfolio invested solely in fixed-income securities or bonds won't effectively handle inflation.