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Living In An Inflationary World

by Ellen Anderson | May 3, 2021 | Investment Planning, Wealth Management

Concerns of an inflation comeback are ramping up among investors and Wall Street professionals alike. Here, as qualified retirement financial advisors, we break down some of the basics of inflation and how it impacts you and your retirement planning.

What is inflation? Inflation is the rate at which a chosen basket of goods and services purchased in the U.S. increases in price over a year. The most common measure of price changes is the Consumer Price Index (CPI). The CPI can be used to ask how much will a dollar today buy versus what a dollar would have bought in the past. For example, you would need $3.40 in January 1980 to purchase what $1.00 would cost you today, according to the Bureau of Labor Statistics inflation calculator.

For retirees, the question becomes how much will $1.00 today be worth in the future? Inflation erodes purchasing power, meaning you will need more dollars in the future to buy what you could for $1.00 today.

What causes inflation? In simple terms, inflation happens when too many dollars are chasing too few goods. In today’s world, increases in oil prices, massive fiscal support, and expectations of strong pent-up demand are contributing to inflation concerns because they indicate too many dollars (i.e., stimulus checks and low interest rates) are, or will be, chasing too few goods (i.e., oil and other goods and services as people start spending that money).

What are some common effects of inflation?

  1. Inflation erodes purchasing power, meaning you will need more dollars in the future to buy what you could for $1.00 today.
  2. Knowing your $1.00 will lose value, a response is to buy things now and invest in things that may be less likely to lose value.
  3. As consumers buy and invest more, inflation leads to more inflation. Again, too many dollars chasing too few goods.
  4. Spending leads to economic growth. Consumer spending is the largest component of GDP (Gross Domestic Product) which is a common measure of a country’s overall economic health.
  5. As spending increases, companies make more money and may hire more people, in turn potentially reducing unemployment.
  6. In the U.S., the Federal Reserve has historically raised interest rates to control inflation, which increases the cost to borrow money. Low interest rates and low cost of borrowing further encourage consumer spending and investing.

How could inflation affect me?

Pre-retirees and retirees alike may worry that the value of their investments may not keep up with inflation, particularly healthcare inflation. Families with children may be more concerned about education inflation. Retirees receiving Social Security and other inflation-adjusted benefits may be less concerned with inflation.

How inflation will affect you depends on your personal cost of living—in other words, your personal inflation rate may be higher or lower than the national CPI. Consider your major expense categories to determine your personal inflation rate.

What can you do about inflation?

  1. Factor in your own personal inflation rate—consider trimming your budget in high inflation areas.
  2. Consider whether the possibility of higher inflation calls for a more conservative approach to withdrawals post-retirement.
  3. Consider maximizing cash flows from income sources that are inflation-adjusted, like Social Security.
  4. Maintain a diversified investment portfolio that is designed to outpace inflation.

If you are concerned about how inflation may impact your investment portfolio or retirement plans, please give Tull Financial Group a call at 757-436-1122 (toll-free at 888-296-7526). For over 30 years, we have been providing sound financial planning services and advice to investors in Chesapeake, Virginia Beach, Norfolk, and across the Hampton Roads region. We would be happy to provide you with customized financial advising that takes both your personal concerns and larger economic concerns into account.

The information provided in this article is general in nature and is not intended to address your investment objectives, financial situation, or particular needs. This material should not be interpreted as a means by which to make investment decisions or as any form of substitute for individualized investment or financial planning advice. Prior to making any investment decision, readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. TFG can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.