Wealth Management & Financial Planning

Wealth Management & Financial Planning

The Impact Inflation Can Have On your Financial Future

Every family across the country has had a conversation around the topics of wants vs. needs, with the end decision having an economic impact. The consequences are heating up as worldwide birth rates are declining. This is true especially of the service sector. When you have more money and have more demand chasing fewer goods and services, you have the recipe for inflation.

This column comes from a non-economist, but rather a Financial Planner that studies the art of successful retirements. In my opinion, after 31 years of helping families plan for retirement, I will alert you to the fact that there are two things short of the obvious (saving and accumulating assets) that will separate you from retirement: The Internal Revenue Service and inflation.

Inflation by itself is not a bad thing. Who doesn’t want their home or 401k to go up in value? There is a problem with hyperinflation (inflation passing 4.5% annually is the usual definition used to describe hyperinflation) where price increases exceed the economic growth level. The argument made by economists today is that inflation is around 2-2.5%. Forgive my boldness, but for most of you reading this article that is an outright lie.

There are two components of the Consumer Price Index (CPI) that are used to come up with an inflation level. One incorporates goods such as televisions, washers, toasters, etc. The other is services like cable TV, barbers and the landscaper. I am now 51 years of age and I don’t know about you but our budget is heavy on services and light on goods. We have all the “things and stuff” we need. We increase the amount of services required every year from dog sitting, healthcare, and window washing at the office.

Assuming you aren’t trying to do retirement planning on your own, you have probably sat down with a qualified professional who has provided you a set of assumptions. One major component in the myriad of assumptions is inflation.

When looking at the normal lifespan for a husband and wife, research by Vanguard and the Society of Actuaries found that at least one spouse has a 72% of living to age 85 and 45% of celebrating their 90th birthday. With that, the difference in an inflation assumption of 3% rather than 4% can have a six figure impact.

As you ponder the idea of retirement, it will serve you to understand your personal inflation rate rather than government and economic concoctions of reality. You are unique! God made you and your journey unique. That simple truth is both a good and encouraging implication, but it is also a challenge going forward. You must make the most of professionals with experience to try and help you assess the unknown future but you also must know your own behavior patterns. Figure out your needs and wants for the future and plan accordingly.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.


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