Financial Insights Blog

Factoring Inflation into Your Retirement Plan

We all feel it…

That deep gouge into our pocketbooks when we’re standing at the gas pump, jaws on the dirty service station cement, as we gaze incredulously as the price quickly creeps toward $4.00 per gallon…

The churning in the pit of your stomach when every little “beep” of the scanner seems to exponentially double your grocery store total in the checkout line…

Fearing your vehicle is about to go kablooey, but knowing there is no way on God’s green earth you will pay over 40% more for a used vehicle in today’s market…

The annual inflation rate in the US has accelerated to 7.5% this year and is at its highest since Michael Jackson’s Thriller was released and E.T. debuted in theaters.

For those of you not hip with eighties pop culture, that was 1982. 😊

This begs the question:  SO, WHAT DO WE DO ABOUT IT???

Well, for starters, we take a deep breath.

Next, we need to take a proactive approach.  In other words, take a cue from your friendly neighborhood Boy Scout and BE PREPARED.  This starts with a new monthly budget that reflects rising costs and a nicely padded emergency fund.

Once those items are in place, it’s time to develop a plan with your advisor so that inflation doesn’t kill your retirement savings.  With folks living longer, its important to ensure your dollars don’t run out before you do, but now with insane inflation rates, planning for this becomes even more critical.  If we knew how long we were going to live, planning would be so much easier.  But no, our longevity is a giant question mark in this equation, so we are forced to build our plan based on the facts.

  • We know, without question, that the cost of goods rises over time. Yes, we are in a period of extreme inflationary rates right now, but even during “normal” times, inflation hovers around 3-4%.  Knowing this, the cost of goods will DOUBLE every 23 years or so.
  • We also know that the historical return on a cash position is less than 1%, then by using basic math can quickly conclude that keeping your portfolio in cash is a losing game.
  • The historical return on a bond portfolio is 3-4% and, applying that same basic math, we can see that our portfolio takes a kick in the gut. Our dollars simply aren’t holding their value.
  • Now take the stock market… the average return of the stock market since 1926 has been 9%. Even if we factor in today’s 7.5% inflation rate, the portfolio invested in equities is the only opportunity available to hedge against rising costs.  Money is truly only as good as its purchasing power.  That wad of cash sitting in your bank account may be able to get you by today but what happens to that same wad of cash when we fast forward 20-30 years?  It’s purchasing power goes in the toilet.

This thought process certainly challenges the very old line of thinking that a more conservative allocation of bonds and cash is best, especially for those in retirement.  However, what if the stock market is truly the best hedge against inflation?  Pause for a moment and let that sink in…

Is the stock market volatile?  YES.

Is it guaranteed?  NO.

But it may, at least, provide the opportunity to protect your purchasing power throughout retirement.

Not owning equities, especially during a 30-year retirement, could prove fatal to your wealth.  Don’t let inflation kill your retirement.  Meet with an advisor today to build a proactive plan for your dollars.


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