Plan for Inflation, the Terrible Retirement Partner

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It probably hasn’t escaped your notice that consumer prices have gone rogue. Prices for goods and services are surging at the fastest pace in over 40 years, threatening to squeeze households and squelch a potential post-COVID economic recovery.

Economists, bankers, and pundits insist inflation rates reflect pandemic-induced trends and are only temporary. However, many retirees, pre-retirees, and investors are concerned prices will keep going up, stalling economic growth and causing stocks to plummet.

If you are a certain age, you might remember the double-digit inflation of the 1960s and 70s, which reached its apex during the Jimmy Carter Administration. Like all inflation, the price hikes were due to several factors, including an oil crisis in the Middle East, excessive government spending, and a slow-acting Federal Reserve.

Inflation the Silent Thief of Retiree Wealth

Unfortunately, it is impossible to know if our current rising prices are temporary or a sign of things to come. Yet, many economists believe the diversified, globally integrated US economy is big and robust enough to avoid the hyperinflation found in countries such as Zimbabwe.

Still, if you are about to retire, you should maintain vigilance when it comes to inflation. Even if increased inflation lasts only a few years, it can wipe out a significant part of your retirement savings.

An annual inflation rate of just 3 percent seems insignificant. However, at a 3-percent rate, if you currently have monthly expenses of $4,000, they will be $5,000 a month in just 10 years. For this reason, it is critical for individuals within 10 years of retirement to review their plans and adjust for worst-case scenario inflation levels.

Many people fail to realize just how significant the impact of inflation is on their savings. For example, if you own an asset that is bringing in 4-percent returns with no income tax, and the annual inflation rate is also 4 percent, that scenario is equivalent to a 100-percent tax in a time where inflation is at zero.

If the inflation rate were to go to 5 percent, with your asset still making only 4 percent, you would be paying a tax equivalent to 125 percent.

Bake Inflation Protection into Your Financial Blueprint

Inflation is a stealth tax that, although it doesn’t go entirely unnoticed, is not as in-your-face as government-levied taxes. Government tax increases, such as those on income or property, are more readily identified and felt.

On the other hand, inflation is like bleeding to death from a thousand tiny pinpricks rather than one gaping wound. Inflation expresses itself as a few cents more for a loaf of bread, a five-cent price increase on coffee, and so forth. Inflation leaves you scratching your head, wondering how your paycheck could vanish so rapidly.

Retirees and those leaving the workforce must partner with their advisors to put some armor around their wealth in a few years.

Protect your savings as much as possible, or you risk running out of money when you need it most. Your advisor or advisory team may recommend various strategies using certain types of annuities, cash-flowing investments, or even precious metals or cyber currencies.

Depending on your goals and risk tolerance, alternate investment strategies can form a protective barrier against erosive elements, including inflation, sequence of returns risk, and other attacks on your wealth.

The Bottom Line

Like an unwelcome house guest, it’s bound to show up when you least expect it, and it will outstay its welcome nearly every time.

Don’t forget to plan for inflation. ISI

Billy Moreland is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management.

For more information, call 888-998-3463 or go register for the Billy Moreland Newsletter.

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