Back to the Basics: Inflation’s Effects on Your Retirement

In Articles, Articles: Kansas City Office, Articles: Salt Lake City Office, Back to the Basics, SLC Spring 2022, Spring 2022 by Scott Dougan

The headlines are screaming, and the data is real: inflation is on the rise. In fact, we’re seeing higher rates of inflation now than we’ve seen in 40 years. 

Prices are going up and that can be a very scary reality for retirees. But how does that actually impact you? If you’re retired now or planning to retire soon, what will inflation do to you and how concerned should you be? After all, you would not be human, I don’t think, if you didn’t experience some degree of fear at the direction of current events from time to time. The great achievement, at times like this, is simply to not give in to the fear. In a very real sense, my whole job is helping you toward that achievement. 

First, we have to start by asking what is being inflated and what do you actually spend money on? For if inflation is only impacting the collector art world and you aren’t the art collector type, then we shouldn’t have an issue, right? Well, inflation is having a meaningful effect on food, energy (think gas prices), and healthcare. In other words, this isn’t about art collections, this is real goods and services that real people consume. It’s best to pay attention then, because this is and will continue to matter to you and me. The question is, how much will it matter?

There are a lot of experts who suggest that the current rampant inflation we’re seeing is a result of the pandemic and the disruptions to the supply chain and are thus temporary (they say ‘transitory’). As companies in the supply chains were required to close or slow production for health regulations or actual illnesses, they were unable to maintain regular levels of goods production. Fast forward a few months and that hits us where it hurts. If you can’t get your hands on the items you need in order to build the things we all want, demand increases on a smaller supply of goods. The result? Inflation. But it’s possible that as the supply chains get caught up, inflation may slow. We’ll see. 

As a retiree, there are components of a retirement plan that may very well be affected by continued inflation. Other components, however, may help to battle the inflation on your behalf. How you build your plan then, will help determine how meaningful inflation becomes to you. Let me give an example: if you are fearful of the stock market and placed your entire retirement nest egg into bank CDs, then a fixed rate of interest simply won’t keep up with rising prices. On the other hand, if you’ve placed a reasonable amount of your assets into large company stocks, then those companies are able to pass along those inflationary price increases to consumers which is likely to raise the stock price commensurate, not to mention the dividends they pay you. The best way to manage inflation (or deflation, for that matter) is by allocating money to investments that provide the attributes which you desire. 

As retirement planners, we’re constantly working to measure risk relative to likely reward. And in the case of inflation risk – one of 27 risks that a retiree may face – we know that trying to eliminate all market risk from a portfolio exposes a retiree to other unintended risks like inflation risk. In other words, effective planning is a give-and-take proposition, a process of managing compromises. 

As inflation continues, we encourage retirees to confront their fears with data and facts. The key is to acknowledge the existence of the apocalypse du jour, and freely to admit its implicit scariness, but never to engage directly with it – if for no other reason than that it is irrelevant to our organizing progression: goals – plan – portfolio. 

Two noteworthy data points are these: owning some stocks is the best, most proven way to mitigate inflation risk, and retires as a population tend to spend less money as they age. That is, even though inflation will continue to be a factor in all of our plans, the natural tendency for aging people is to spend less money over time. So, when inflation causes prices to rise, the fact that retirees gradually spend less money on fewer things means there’s a built-in inflation hedge already. The one category where most retires do spend more as they age is health care, which may include nursing care. So, a retirement plan should consider these costs in order to hedge the inflation-eroding power to a portfolio. If you enjoy travel, then consider either building those costs into your basic budget in the early active years of retirement, then pair those expenses with guaranteed or certain income sources. Or, some retires will base their travel on how well their market-based portfolio is performing. When it’s up, travel abroad; when it’s down, travel domestically or locally. Either way, have your priorities built into your plan. 

In the end, inflation is real and will continue, even when we don’t know how much of it there will be. The key is to build a plan that incorporates elements that are designed to fight inflation but also to include assets that protect you from a market decline. The balance of such components is what will ultimately determine how your retirement will look financially. We can help you do this. My purpose is simply to suggest that – difficult as it may be – we take our focus off the onslaught of catastrophic headlines, and put it where it belongs: (a) on your goals, (b) on our long-term plan for the achievement of your goals, and (c) on your portfolio as the long-term funding medium for that plan. 

With all of that said, you may still desire either a plan adjustment or a review of what your plan is already built to do for you. In our planning together, we’ve elected to be guided by history as opposed to headlines. Invited by the media to subscribe to the bizarre thesis, “This time it’s different,” we respond instead, “This too shall pass.”