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I'm Planning for Retirement, What Do I Do About Inflation?


That's a great question, and one that we help our clients answer every month. It's incredibly important to understand inflation before you try to create a retirement plan.


So...


What is inflation?


You can think of inflation as the increase in the cost of an item over time.


If you look up the US Inflation Calculator, you’ll be able to type in any date range to find out how much inflation has affected the purchasing power of a dollar.


In the example that automatically populates their homepage, you can see that if you purchased something for $1 in 1913, then in 2021 the same item would now cost $27.58.

As you can see, one dollar doesn’t get you as much as it used to.


Prices increase over time. This increase in prices inside of an economy is called “inflation.”


Imagine with me that you own a business. In this business, you sell widgets. The widgets are selling out in many stores across the country and so, you decide to raise the price. Even with your new price, the widgets keep selling. Would you see that as a benefit to your business? If you used the price increase to pay your employees more, they would see that price increase as a benefit as well.


There are clearly a few positives to inflation. Depending on who you are and how you’re looking at it, a mild amount of inflation can help your business thrive.


However, the negative side is… eventually, the amount of money you’re able to pay your employees will probably, someday, no longer keep up with overall inflation.


Generally, what happens in most economies is that your income stays the same, but the price of necessities increases over time.


Keeping an eye on inflation is something that the federal government takes pretty seriously, but they don’t do a great job of controlling it, especially when they start printing money and keep interest rates impossibly low. It's hard to control those inflationary pressures.


There is also a type of inflation known as demand-pull inflation.


If you know anyone in the construction industry, you’ve seen this inflation play out in 2021. This happens when the supply of something is down and the demand for that same thing is up.


Steel and lumber have both seen a surge in demand this year, but the supply has been limited. The price of lumber shot up 200% in the summer due to a lumber shortage. That’s inflation. Specifically, demand-pull inflation. High demand plus low supply equals rising costs.


Okay, now that I’ve bored you with an economics lesson, let’s get to some ideas for creating a retirement plan that isn’t completely wrecked by inflation.


First, you really want to avoid long-term, fixed-income investments.


Things like bonds, if they're set to mature over 15, 20, or 30 years, will generally end up getting outpaced by inflation. We're setting ourselves up for a low rate of return over a long period of time with products like this.


Second, you need to research strategies that will provide you with a secure, guaranteed income in retirement so that you have a base amount of income in order to build your budget. Maximize social security, maximize pensions, and add in financial products with guaranteed payouts.


Fixed Index Annuities (FIAs) are insurance products that may be able to help your savings to outpace inflation with their guaranteed payouts.


A Fixed Index Annuity combines the benefits of tax deferral with the potential for interest earnings based on positive changes in an external index (a measurement of a section of the stock market) without actual participation in the market.


Because the market changes so often, we research these vehicles often and I know that there are quite a few high-quality options out there that can create peace of mind when it comes to creating a successful retirement plan.


That’s also why I am independent financial advisor. I have the ability to find the best and the brightest options for my clients and I’m not stuck with one carrier, one company, or one strategy.


I’ve found that each person has a unique plan and a special path that will get them there- obviously there are ways to do it yourself, but if you get to a place you feel overwhelmed, this stuff is my passion.


Third, be prepared to spend wisely.


Many people downsize their homes in retirement so that they have lower utility bills, lower property taxes, and no mortgage. Others consider that inflation could send the price of big-ticket items like vehicles up quickly, so they make the decision to secure those purchases before they are on a set retirement income. It’s important to keep the realities of inflation in mind when creating your budget and building your plan.


Finally, consider your standard of living. What's your income goal?


Are there non-negotiables that you enjoy now that could be affected by inflation? What about healthcare costs, have you considered how to save for eventual health care needs? Do you have an idea of how inflation could affect the cost of healthcare as you journey through retirement? The fact is that healthcare is one of the areas that gets hit the hardest by inflation.


I know these aren’t the fun topics to discuss when we dream of our lives after we’re done working, but they are realities that we've got to plan for.


You may want to reach out to a financial professional as you dream about what you want your life to look like in retirement. Make sure you're including all of these components: inflation, taxation, longevity, market volatility...


We look at the trends and can help you calculate an estimate of how much savings you need to stay ahead of inflation. The general rule of thumb has been to calculate an extra 3% each year in order help to keep up with inflation. However, over the last 12 months, inflation has been at 5%. That’s the highest it’s been since 2008.

The bottom line here is, there are ways to protect your savings so that you get the life you want and avoid the pitfalls inflation can cause.


I’m here for you if you get stuck in the process, just shoot me an email or give me a call.


You’re not alone in this planning process.


These are things that you have to know in order to build a solid retirement plan. But, if you get overwhelmed considering these eventualities, remember, you don’t have to build it alone.

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