How to Plan for Inflation in Retirement

Inflation is something everyone is dealing with right now. However, we focus on retirement planning. We want to help ease the minds of those trying to secure their retirement or those already enjoying life after work.

We’re going to be answering a lot of great questions today, including:

• What causes inflation?
• How to protect against inflation?
• What to think about when deciding to retire?
• How to prepare your spending plan?
• Can an income bucket protect against inflation?
• Should I consider Roth conversions?

As you can see, we’ll be covering quite a few questions. So, grab a cup of coffee or some wine and settle in.

6 Questions and Answers When Learning How to Plan for Inflation in Retirement

1. What Causes Inflation?

Inflation is caused by quite a few things, but we’re going to discuss it from the view of what is driving inflation in 2022. Many people have stressed their concerns over the government printing money in recent years, and the main issue with printing money is that it dilutes the dollar’s value.

You may have $100, but the $100 is worth less than it was a few years ago.

This round of inflation is partly due to printing money, but there’s also:

• Low supplies due to supply chain issues
• High demand

When demand remains high and supplies are low, prices go up and inflation begins to hurt consumers. Low supplies always lead to higher prices because retailers are making less money and need to turn a profit.

Perhaps there are only 1,000 tires in stock when a company normally sells 2,000.

In this case, the company raises the price of the 1,000 tires when demand is high because they still need to pay their bills and remain in operation.

For example, we’re booking a flight for a meeting, and prices for a flight have never been this high. High prices are due to a few things:

• Higher fuel costs
• Some planes have been grounded
• Staff shortages

However, we’re seeing indicators that inflation will subside, and supply chain issues will correct themselves. 

Will prices go back down to before inflation hit?

Probably not.

But we believe that prices will fall back down and level out. We’ve had issues in the past with inflation and supply chain issues. We’ve seen gas prices skyrocket, and then they recede, and everyone is happy again.

Keep in mind that the last decade has seen low inflation rates, and now the high inflation is somewhat of a shock for consumers. We’ll be going over a brief history of inflation in just a few minutes that will help you understand what we mean when we say inflation has been low.

2. What Can We Do to Protect Our Savings and Retirement from Inflation?

Protecting yourself against inflation really depends on one of the two types of investing:

1. Passive
2. Active

If you’re investing using a passive approach, you’re going to ride out inflation and see how your retirement pans out. However, we believe in a more active approach to investing, which allows you to adjust your portfolio to invest more in what’s working now than what’s not working.

Supply and demand exist in investments, so we try to find high-demand areas to protect against inflation.

For example, you may have heard about a 60/40 portfolio, where 60% of investments are in equities and 40% in bonds/fixed income.

The 60/40 methodology is risky right now because bonds are struggling tremendously in 2022. The 40% that is meant to keep you safe in retirement is hurting you just as much during inflation.

Instead, you can do things with an active portfolio that better protects your retirement at this time.

3. How Does Inflation Impact Your Plan on When to Retire?

If we were helping someone with their retirement planning, we might recommend delaying retirement by a year if there’s no room to cut back on spending. It’s very rare that we’ve ever had to tell someone to delay retirement, but it may make sense in some cases.

Right now, due to inflation, this may mean working for an additional year if your retirement plan is very tight.

You may also want to retire from a full-time job and go into a consulting plan to keep some money moving in. However, if your retirement is well-funded, you should be fine to retire, especially if you can curb your spending in the short term.

4. How to Prepare a Spending Plan During Inflation

We’re having a lot of our clients ask us about adjusting their spending plans, and when inflation is running at 8% – 10%, it’s a scary time for many people. We’re certainly going through a rough few years since the pandemic.

But inflation will come back down, especially with the Fed working to bring inflation back down.

For the past 10 years, we’ve averaged 2.51%, so we’ve been spoiled. However, over the past 100 years, we’ve had inflation at 11% and into the teens. During the late 70s and into the early 80s, we had 11.3%, 13.5% and 10.3% inflation.

If we average inflation over the past century, it was around 3.2%.

Inflation didn’t remain at 10.3% since the 80s, so inflation will come back down and enter into some form of normalcy.

When creating your spending plan, we’ll discuss:

• Wants
• Needs

Retirees have the ability to adjust their budgets and can even decide to travel when it’s most affordable rather than in peak season. Minor control like this can help you stay in retirement and keep money in your pocket. 

We can also run inflation scenarios when creating a spending plan to account for periods of inflation and ensure that you’re well on your way to retiring and living the life you want in retirement.

5. Income Buckets and Inflation

We talk a lot about income buckets when trying to secure your retirement. Income buckets come in three main types:

1. Cash
2. Growth bucket
3. Income/safety bucket

If your income bucket is set up to help you avoid the stock market concerns, you don’t need to think about stocks. Income buckets are guaranteed income that will come in every month to help you pay your bills for 10 – 20 years.

These income or safety buckets help you survive through inflation without much concern about what’s happening to the stock market. And for us, the peace of mind that these income buckets offer is worth setting them up.

6. Should You Do a Roth Conversion?

We believe everyone should at least consider a Roth conversion because it is beneficial. Conversions take pre-tax assets, pay taxes on them, and then convert them into a Roth account.

There are tax implications to converting these accounts, but you’re paying taxes now and avoiding potentially higher tax rates in the future.

For example, let’s assume that you have $100,000 in an IRA that you haven’t paid taxes on. The market falls 50%, and now you have $50,000. Since the portfolio is down, you can convert a larger percentage of your assets that you can convert and pay less taxes.

Tax-free growth is something to consider, especially in a down market.

However, please talk to a tax professional to better understand the immediate tax implications of converting your accounts.

Do you need help trying to secure your retirement? Schedule a free, 15-minute conversation with us today.