(This post is a part of the series on Basics of Finance and Investing.)

The short answer to this question is that we should invest to be able to shift our purchasing power from the high earning phase of our life to the low earning phase. Many of us earn more than we need to spend in our working life (note the italic - some of us spend more on our wants rather than our needs). It is the exact opposite when we retire - we spend more on our needs than we earn. Therefore, we must have adequate funds available when we retire to live out the rest of our life.

It used to be easy before. Most employers offered pension schemes that guaranteed a steady paycheck for their ex-workers as long as they lived. This concept has almost become a thing of the past. Instead employers today offer various “retirement plans” that encourage workers to sock away a portion of their payment for the future. In short, the burden of supporting yourself in retirement has shifted from your boss to you.

The primary objective of investing is then to have a reasonably comfortable life after retirement. (Increased longevity extends our retired life, not the working life. With the average life expectancy of 78 years in America today, we are talking of almost 20 years in the sunset, and even longer for some.) One way to achieve this goal is to store the “excess fund” during our working period as financial assets, such as stocks and bonds. After retirement, we sell these assets to meet our consumption needs.

We are talking of shifting the purchasing power of money, not the money itself. With inflation steadily eroding the value of a financial asset with time, a dollar 30 years later will buy a lot less than it can buy today (I bet you won’t begin your breakfast with a 99¢ cheese burger then.) So, our asset must at least grow apace with inflation just to preserve its purchasing power. (From the recent CPI data, this means the return of our investment should be at least 2.5%.)

Merely compensating for inflation is not enough, though. Remember that our paycheck reduces drastically after retirement (it vanishes altogether for most). We must have enough assets accumulated by that time to be able to steadily draw out from them for many more years, without facing the risk of outlasting them. So, the derivative goal of investing is to implement a strategy of growing our asset as fast as the prevailing market conditions allow.

I have used the words “asset” and “financial asset” a few times here. In the next post, we will see what they really mean.

See related posts:

1. Inflation and retirement
2. "Real" and "nominal" interest rates
3. What is an "asset"?
4. Social security - will it be there when I retire?
5. Players in an investing environment