Month after month, the inflation train keeps picking up speed… Today we ask, are you riding the rails? Or are you on the tracks?
The latest official report from the Bureau of Labor and Statistics announced that consumer price inflation (CPI) of all items rose 8.5% in March 2022. This is the highest inflation in more than 40 years. Much higher than when energy price inflation was hiding in plain sight back in September 2020, at a time when drivers weren’t driving as much.
A few of the notable price surges from the latest release, reported as year-over-year (in other words, how much you’re paying today compared to the same item’s price a year ago):
- 70.1% increase in fuel oil
- 48% rise in gasoline prices
- 35.3% more costly used vehicles
- 11% more expensive electricity bills
- 10.0% climb in prices for food at home: “All six major grocery store food group indexes increased in March”
- 5% growth in shelter (rent/home ownership) expenses
In fact, the only good news was a 3.8% monthly drop in used car prices.
Now, we talk about inflation a lot, and here’s why: without stable purchasing power, it’s incredibly difficult to plan for the future. We discussed this a while back, using the phrase, “$3 million is the new $1 million.” All too often, we think of our savings in terms of the number of dollars we have.
However, any number of dollars is meaningless unless their actual value, over time, is stable.
With that in mind, we ask whether this astronomical surge in prices derail retirement plans across the U.S.? We hope not! (It certainly doesn’t have to.)
In a new article on Kiplinger, Doug Kinsey expresses concern that a lack of price stability can really complicate our retirement math:
While it may be early to adjust long-term inflation assumptions in your retirement planning, if supply chain issues and consumer spending don’t become more normalized to long-term trends, an increase in inflation to even 4% over the long run could have a significant detrimental impact on retirement savings and maintaining your lifestyle throughout retirement. [emphasis added]
Considering that today’s inflation rate is more than double the “detrimental” amount, the next question should probably be:
What can we do about it?
Fortunately, we are far from helpless! Kinsey has some practical steps to help keep us from getting tunnel vision…
Ways we can keep our retirement plans on the fast track
Kinsey offers a good starting point for you to consider, even if it sounds a bit obvious: inflation expectations are a very important input into your calculations.
When making retirement plans, jumping from an assumed inflation rate of 2.4% to a rate of 4% reduces the net return on the typical portfolio from 4.6% to 3%. This seemingly small difference can have a huge impact on portfolio sufficiency projections, and in your ability to maintain your purchasing power throughout your retirement. [emphasis added]
Basically, this just means you should place importance on factoring expected inflation into your retirement savings plan. Not a bad idea. To help us get started, here are three suggestions that BankRate’s Brian Baker offers “to keep inflation from wrecking your retirement”:
1. Avoid holding too much cash: As a long-term investment, cash is not where you want to be, especially when the economy is experiencing high levels of inflation. As inflation takes its toll, you’re able to purchase fewer goods and services each year with your cash.
2. Reevaluate your portfolio: In order to combat high inflation, you’ll need to invest in assets that can help you maintain your purchasing power over time… there are other [inflation resistant] investments, such as inflation-protected bonds and commodities, that may help you stay ahead of inflation.
3. Consider delaying Social Security payments: You can start receiving the payments at any time between the ages of 62 and 70, but the payment increases for each month you delay up until age 70.
Of course, planning for healthcare costs, emergencies, and moderating your spending habits are also worthy considerations when prices are skyrocketing and unpredictable.
Our primary concern is quite simple: most people don’t concern themselves with this sort of thing. Instead of making a solid retirement plan and sticking to it, adjusting either the plan or their expectations when conditions change, they simply hope for the best.
Instead of taking their financial futures into their own hands, they expect someone else to take care of the details for them.
They treat their retirement as just a long vacation that they’ve earned – and show up like tourists at an all-expenses-paid cruise, without a care in the world, ready to hit the buffet.
And a lot of people are going to be in for a shock when their dream cruise turns out to be much shorter than they expected. In the words of one economics professor, they may want to just jump off the boat…
Economist warns, “Retirement for most people is financial suicide”
In a recent interview, Laurence Kotlikoff, the brash Boston University economics professor and Social Security expert, explained the biggest mistake that Americans saving for retirement make:
A lot of people are just not planning for it. They leave it to somebody else. They're assuming that Uncle Sam and their employer are taking care of them. Then they are surprised when they hit retirement and find that they may not have enough money. I think retirement for most people is financial suicide.
The solution? Lifetime budgeting. In other words, “not asking what you would like to spend, but here’s what you can spend.”
The entire interview is worth reading. If you’re strapped for time, here are the highlights of Kotlikoff’s suggestions:
- Save more
- Take advantage of any 401(k) match your employer offers
- Insure adequately
- Diversify your investments
- Don’t retire “too soon”
- Don’t “take Social Security too early at a much lower benefit”
- Don’t borrow money to invest
- Don’t believe that “stocks are safe long-term” investments
- Don’t live “house poor”
It’s not all gloom and doom, though! In fact, at the end, Kotlikoff has some inspiring final thoughts:
Work on your financial health now, so you can spend your money ‘til the end. That’s the object. And if you've made a lot of money, if you're rich, you don't want to put it in the stock market. The stock market could drop 50%. It has.
The primary takeaway here is, your retirement is much more than just a “long vacation.” So if you don’t have a retirement savings plan, now is the time to get started. Be sure to account, as best as you can, for inflation’s impact on your spending power.
If you do have a plan, now is the time to evaluate it against the current conditions as Kinsey suggested. The other suggestions offered above might be worth your consideration as well.
It might also be a good time to take a deeper look into your buying power, the value rather than the dollar amount of your savings. We’ve created an entire guide comparing inflation-resistant investments. One highlight:
Regardless of the causes of inflation, this erosion of buying power is of crucial importance to anyone saving for the future. You must consider not only how much money you have now, but how much of its buying power will be silently consumed by inflation in the years ahead.
Preserving as much buying power as you can with the dollars you have now? For prudent savers, that just makes good sense. While you’re at it, take a few minutes to learn how physical gold and silver can help keep your plan on track.
With a solid plan, realistic expectations and a little luck, maybe we can set ourselves up for “the longest vacations of our lives.”
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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