Before diving into the topic of inflation, and the impact of it on your retirement planning, it is vital to remember the importance of having a plan, reviewing it regularly and sticking to it.
A prudent way to weather financial storms is to think of your overall investment results versus the investor results. You do not want to become a statistic.
In times of uncertainty, it can be hard to stick with a plan, but I have found that because my clients have a plan when they call now to check in about the economic environment, they are most often calling for reassurance that we have already done the appropriate things.
If you just come in with a high-growth portfolio, there is no insulation when the unexpected happens. I do not care how great you think a company is. When the tide goes out, it will affect almost everybody.
On the inflation front it is important to note that the historical average for inflation has been 3.2% to 6%. The highest inflation on record was 23% in June of 1920. As of May 2022, the US inflation rate was 8.6%.
So what will be the impact to you?
If you are a pre-retiree or a retiree, inflation will have the greatest impact on you.
Example with the Rule of 72:
If you are 60 and need $100,000 to live in your retirement at 4% inflation, 4 goes into 72 18 times. How long will it take to double?
By the time you are 78, you would need $200,000 of income. You did not change a thing, but the $100,000 you needed has now turned into $200,000.
Let us say you have $2,000,000 and you are planning to take a 5% withdrawal rate. You are all good, right?
No, you are not….
At $100,000, with a 5% withdrawal rate, you know in 18 years you need double that number just to buy the same goods and services. (And that is considering a 4% inflation rate. Right now, we are over 8%!!)
Inflation is a big deal!
What is that number? Is it 4%? Is it 2%? Is it 8%? That is where you need to work with your financial advisor to put a stress test on your plan.
When I started in the business, we did linear analysis. You would just assume an 8% return, 3% inflation. With that you would net 5%, but the problem is you do not get 8%. You get up 15% and you get down 12%. The inflation numbers change.
The financial plans used to be obsolete by the time the printer ink dried.
Now we can put a stress test on the plan. You get negative returns early; you have high inflation to see what it is going to do.
You should consider working with an advisor that can stress test your portfolio, to put a high inflation number on there to see what it is likely to do.
Do not forget about pension plans.
Not everyone has these anymore, but a lot of people still have a pension plan. If you have a pension plan that will provide $50,000 a year in income, and your income need is $100,000 at age 60, your pension would be providing 50% of your income need. Again, using the rule of 72, by age 78 you would need $200,000 of income. Many pensions are not indexed to inflation. So now, if you need $200,000 of income, your pension is only going to provide 25% of your income needs. And that’s where people still need stocks and retirement is to offset the help offset the, the impact of inflation.
The bottom line is the markets can be uncertain. We are living in interesting times and the financial markets are hard to predict. The best thing you can do is have a financial plan, review it regularly and stick to it.
Still have questions? We are here to help.
If you would like us to look at your retirement and see if you are utilizing the best possible options, we would love to meet with you and learn more about your goals to see if there is a good fit for us to work together. Reach us at 562-432-3783 or [email protected] to schedule a free introductory meeting.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance reference is historical and is no guarantee of future results.
The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value hypothetical examples are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.