Will inflation derail your retirement plan?

In over 20 years as a paid financial planner, I have witnessed many situations where external factors and individual choices threatened to derail clients’ financial plans. Some of these situations are avoidable and others are beyond our control. The key is to identify these threats early and determine if any adjustments are needed to ensure the plans we create with our clients stay on track.

Inflation is one of the retirement threats we all need to talk about right now. We’ve been in a fairly subdued inflation environment for several decades, and the assumptions built into financial planning software – which many financial professionals use to help develop and test people’s retirement plans – have hovered around 2.4% in many cases. This makes sense, given that the average inflation rate in the United States from 1990 to 2021 is. 2.48%. But is it high enough, given the state of our current economy?

Since the pandemic, supply chain issues and consumer demand have significantly pushed up short-term inflation in the United States. The consumer price index, a key measure of inflation, was 4.7% in 2021, a level not seen since 1990, according to Statista. The monthly 12-month inflation rate in February 2022 was 7.9%, and with the advent of war in Ukraine, some experts predict that US inflation will reach 9% or more in 2022.

While it may be early to adjust long-term inflation assumptions in your retirement planning, if supply chain issues and consumer spending aren’t further normalizing to long-term trends, an increase in inflation to even 4% in the long term could have a significant negative impact on retirement savings and maintaining your lifestyle throughout retirement. This is worth monitoring and making adjustments to your projections as needed.

According to Goldman Sachs, the commonly used 60% stock / 40% bond allocation has averaged an annual rate of return of 11.1% over the decade ending in 2021. Based on longer time horizons, we generally don’t expect more than 7% expected return for similar balanced portfolios. When planning for retirement, going from an assumed inflation rate of 2.4% to a rate of 4% reduces the net return of the typical portfolio from 4.6% to 3%. This seemingly small difference can have a huge impact on portfolio sufficiency projections and your ability to maintain purchasing power throughout your retirement.

How should you handle this? First of all, be aware that inflation expectations are a very important factor in financial planning calculations. Make sure you understand the inflation assumption in the financial planning tool your advisor uses. According to the World Bank database, the average inflation rate in the United States from 1961 to 2020 is 3.3%. If your hypothesis falls below that, it may merit further evaluation.

If it looks like a sustained rise in inflation could significantly hurt your plan—or if you’re just concerned about inflation in general—there are several possible solutions you can consider:

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1. Delay retirement to full retirement age for Social Security

The onslaught of the pandemic has changed the process of thinking about retirement for many people. We’ve seen an increase in the desire to retire early, which affects other aspects of a retirement plan, such as health care costs and helping kids get to college.

If you’re worried about making your money last until retirement, it makes sense to wait until your full Social Security retirement age, which is the age at which you’ll receive your full Social Security benefit. It’s usually 67 for most people.

If you love your job and your career, keep your job and take advantage of falling health care costs (a major inflationary factor) and keep saving as much as you can in your 401(k).

If you can’t wait until age 67, consider working until at least age 65 so you can take advantage of Medicare.

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2. Reconsider some of your post-retirement goals and their costs

A gray-haired couple is kissing in an empty room of a new house.

Buying a new home, possibly somewhere you might prefer to live, is one of the main factors for many. Home prices have been significantly impacted by pandemic-related increases, which are expected to subside over time. Perhaps delay that goal or make it easier by renting in your preferred location for a few years after your current home has been sold.

Also look at what I would call “extraordinary” goals, or larger occasional purchases that happen less frequently, like new car purchases or big trips. Is it possible to move one of your big international trips to a trip closer to home? Instead of planning for a new car every five years, consider a gently used car that can offer much better value. Would it be a good time to sell one of your rental properties? There are many possible solutions for each individual situation. Some of the best financial planning tools allow for quick adjustments to financial goals so that possible trade-offs can be assessed. We consider this a mission critical capability.

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3. Reposition your portfolio

A colorful camembert.

Consider including higher exposure to commodities, dividend-paying stocks, inflation-protected bonds, and publicly traded real estate. This can be a good time to review your overall allocation and confirm whether you are investing appropriately given your time horizon and other factors in your financial plan.

However, keep in mind that while minor adjustments to counter inflation may be in order, don’t let the current market volatility discourage you and abandon your entire strategy. If you don’t have a well-thought-out strategy in place, consult an advisor to help you do so.

4 out of 5

4. Rethinking the cost of higher education

A student reads a book on stairs.

It has become a recurring topic with some of our clients, given the high cost of education and some of the challenges of today’s job market. There are resources available to help you manage student loan repayment and consolidation, if needed, such as Gradfin (https://gradfin.com/).

Taking on high levels of debt for your children’s education while trying to finance a successful retirement can be a daunting challenge in an environment of high inflation. It’s no secret that the costs of education have skyrocketed over the past few decades, and if headline inflation rises, many will reconsider how to tackle this situation. The good news is that with a little creativity and flexibility, your children can still receive a quality education at a reasonable price.

  • One solution is to take two years at a community college and then transfer to a preferred public school. Many states have articulation programs where public universities will accept credit from their state’s community colleges.
  • Another solution is to take a close look at the many new online and hybrid programs offered by universities. Some of them are offered by leading universities and provide valuable degrees at a fraction of the cost.
  • Also, as long as the overall cost is reasonable, there is nothing wrong with students taking on some of the debt themselves. Education can be called “good” debt as it should allow the student to earn more money during their career.

There are a lot of caveats here, such as curriculum, school reputation, etc., but the bottom line is that parents shouldn’t sacrifice their own retirement for their children’s education. .

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5. Seek the advice of a qualified financial adviser

A man happily greets (or goodbye).

A finance professional can help you develop a suitable plan and test different scenarios. And be sure to update your plan regularly, taking into account current market conditions and changing goals.

In conclusion, there simply hasn’t been enough serious discussion within the financial planning community about changing inflation expectations. Don’t be taken by surprise or complacency when you seriously consider a future retirement goal. Review your assumptions and seek appropriate guidance to ensure you have a successful retirement.

Partner, Artifex Financial Group

Doug Kinsey is a partner at Artifex Financial Group, a financial planning and investment management firm based in Dayton, Ohio.

Doug has over 25 years of financial services experience and has been a CFP certified since 1999. In addition, he holds Accredited Investment Fiduciary and Accredited Investment Fiduciary Analyst certifications as well as Certified Investment Management Analyst. He is a graduate of The Ohio State University and the University of Chicago Booth School Investment Management Education Program.

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