Could Inflation Affect Your Retirement?

by | Jul 13, 2021 | Asset Management

Inflation, the word that seems to be everywhere lately. Yes, it is true, as the cost of goods rises, the value and buying power of retirement accounts may diminish. Goods and services will cost more 30 years from now than they do today. That’s just how things work. And for retirees living off of their savings, that presents a problem.

Luckily, there are things investors can do to help protect the value of their retirement.

Average Inflation

On average, the U.S. experiences an inflation rate of roughly three percent. As we’ve discussed on recent podcasts, planning for average inflation is tricky and not necessarily as straight forward as it may seem.

Just because inflation averages 3% per year, does not mean that we can just assume that it will go up 3% per year in a straight line forever. It is an AVERAGE. Meaning, some years it is lower, and some years it is higher.

Historical averages, like inflation, and investment returns provide us useful rules of thumb when it comes to retirement planning. But we must be careful not to assume too much or extrapolate too far out into the future.

Considering Cash Flow

Some financial plans do build in 2% or 3% increases in inflation per year into the withdrawal rate. Or the amount distributed from the retirement accounts.

But our focus is more on managing cash flow needs. After all, if someone is managing expenses fine with current distributions, we don’t necessarily see a need to distribute more from their investment assets.

That’s why we stay in constant communication with our clients in these instances. We have conversations about what is, or isn’t enough. And always stand at the ready to make adjustments as needed.

Managing Life Style Changes

With the above in mind, an important element of managing inflation is avoiding what’s called lifestyle creep. Lifestyle creep is when, as you make more money, you spend more money.

Sometimes it is unavoidable, such as when you have children, are paying for education, or are going through big life transitions. And we’re not going to tell you not to spend your hard earned money because IT IS YOUR MONEY. You have every right to spend it how you want to. And we are not going to stop you from doing that. In fact, we encourage it.

But within reason of course. As you progress in your career and start to earn more money, it may be in your future best interest to bank some of that raise and add it to your investment accounts.

Investing in Stocks

We get a lot of phone calls that go something like this, “I’m going to retire in the next two years, should we get more conservative with my investments? Or get out of the market completely?”

And our answer is usually “NO!”. Investing in stocks for the long term is one of the best ways to ensure your purchasing power does not diminish in retirement. Of course, if the money is needed to live on, we will have part of your asset base in safer investments that do not move around as much as stocks. But even still, we will have some of that asset base invested in the market for this exact reason. At the bare minimum, to keep pace with inflation.

While it is true that goods and services will cost more in the future, it is also true that over 10, 20, or 30 years, the return on investments is greater than the increase of inflation.

Investing for the long-term, managing cash flow, and avoiding life style creep are the best tools investors have against inflation.

Inflation is certainly a buzzword as of late, and we do not want to throw gasoline on the fire and panic about inflation. But we wanted to highlight some things that are within our control and make sure that we communicate our thoughts on what we think folks should be doing to make sure they stay on track for retirement.

Check out more of our thoughts on inflation and interest rates here!

Join our Newsletter


Future-Proof Your Finances

Download the 25-Year Success Strategy

Enter your email & get this free PDF download to help you prepare for the next 25 years.  We will send periodic updates as well. Unsubscribe at any time.

You have Successfully Subscribed!

Share This