The Growing Threat of Inflation

How to Protect Your Retirement Plans

Our financial services help you craft a superior wealth management experience to perfect the science and art of sophisticated wealth management, investment strategies, multigenerational planning, and risk assessment with a craftsman-like approach. We are committed to providing each and every one of our clients with a tailor-made long-term wealth strategy that will accurately prepare them for the future. Your wealth should work as hard as you do. But, it is also important for us to educate our clients about what could hurt their planning if not everything is considered. One of these hurtful factors is inflation.

Whether retirement means a period when you can drift off into travel, pursue philanthropy, work on the occasional home renovation project, or to begin a new chapter by launching a business, retirement to you has always meant a period of joy and exciting adventures.

Because of that, you’ve most likely never had to consider your retirement assets working AGAINST you, or not having the financial independence you’d always expected given your hard work and your savvy saving skills.

Even in normal times before the 2020 Pandemic, anyone who was planning for retirement or was already retired knew the heavy reliance on the longevity of their assets for the financial independence they envisioned. 

But we’re not living in normal times. Turn on the news and you will see headline after headline discuss the concern that the tremendous amount of money floating these days in our economy will potentially result in significant inflation, potentially eating away at the value of assets you are counting to live on and utilize during retirement.

So how should you plan for the unexpected impact of possible inflation?  It’s important to factor inflation into your retirement savings to ensure you have enough assets to last through your retirement years. 

In this article, we will give a bit of a background on inflation, and explain our views on how you can hedge your portfolio against it.

What is Inflation?

Inflation is the loss of buying power a currency (in our case the U.S dollar) has over time due to the rising cost of goods and services. In other words, “it is the decline of purchasing power of a given currency over time.” The U.S rate of inflation is calculated by the US Bureau of Labor Statistics and tracks the price increase of a collection of goods and services. 

There are a number of prominent economic theories that offer insight into how inflation occurs. The Demand - Pull Theory believes that higher consumer demand for products leads to a raise in prices to maintain inventory.  It starts with an increase in consumer demand. But when additional supply is unavailable, sellers raise their prices.

Cost - Push Theory states that inflation occurs when overall prices increase due to increases in the cost of wages and raw materials. Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy. Since the demand for goods hasn't changed, the price increases from production are passed onto consumers creating cost-push inflation. 

No matter what causes inflation, the corrosive effect it has on personal wealth is multifaceted and challenging to navigate.  This can be problematic for those planning on a fulfilling retirement, if the assets at hand may have less value in the foreseeable future.

Why Should You Pay Attention Now?

Since the global financial crisis of 2008, now more than a decade ago, the U.S. economy hasn’t seen much in the way of surging prices and inflation. If anything, investors and economists alike have wondered why prices for many goods weren’t climbing even faster!

Now, with the U.S. government adding trillions of dollars to the deficit in the wake of the COVID 19 pandemic, everyone is heavily concerned about inflation.

Just take a look at what is happening around you.  You may have started to look for a new home to buy, only to find the home you liked sold for 10-15% higher than the listing price.  We’re also seeing significant price increases affecting used cars, medical care, appliances, energy, food and cigarettes in recent months, according to government data. 

How can inflation impact you?

Inflation affects each individual’s wealth differently depending on several factors:

• Wages -  Average wages have increased in times of expected inflation, but if there is a spike in inflation rates, salaries will cover less and less of the cost of living. Contract workers and freelancers who earn at a fixed rate will feel the price crunch even more. 

• Savings -  How effectively a savings account protects you financially all depends on how much value it earns year over year. If your account doesn’t grow faster than the rate of inflation, your savings could actually lose you money in the future. 

• Investments and assets - The type of assets you own will either appreciate or stagnate in times of inflation.  

  • For example, typically, investors buy fixed income securities such as bonds and treasuries because they want a stable flow of income. However, since the rate of interest remains the same on most fixed income securities until maturity, the purchasing power of the interest payments declines as inflation rises. As a result, historically bond prices tend to fall when inflation is increasing.  

  • On the other hand, if there is inflation, theoretically a company’s revenues and earnings should increase at a similar pace as inflation. This means the price of your stocks should rise along with the general prices of consumer and producer goods.

What Can You Do to Protect Your Retirement Assets?

Protecting your assets in the face of uncertain inflation risk can be addressed in a few ways. First, however, there needs to be any granular assessment of the inflation risk for each asset (and liability) in your portfolio. Even items such as rent collected from rental property, or loan payments on mortgages, can have unexpected inflation risks. Understanding these risks is the first step!

Let us help you calculate to see if you are on track for retirement given various inflation scenarios:

If you would like us to calculate to see if you are on track given various inflation scenarios, fill out the form below and someone from our team will be in touch.