Ep. 122 – Inflation And Your Retirement

How will the suspected slightly higher 2021 inflation going to affect your retirement plan?

Inflation is the increase of prices in an economy over time but with income remaining relatively the same. The 2020 pandemic disrupted the economy on so many levels including the increase in demand and decrease in supply.

In this episode of the Secure Your Retirement podcast, we talk about inflation and how to protect your retirement plan from its impact.  We also cover why you need to work with a financial professional to ensure your investment strategy is working well with the rising inflationary type of period.

In this episode, find out:

  • Understanding the meaning of inflation and how the 2020 decrease in supply led to inflation.
  • When inflation is good for the economy and when it can negatively impact us.
  • How high demand and low supply impacts inflation.
  • Double-check your investment plan when it comes to the fixed income side of things.
  • Have a good risk management plan for your portfolio.
  • Think about what your guaranteed income is.
  • Have a good spending plan – understand how you’re spending money.
  • Sit down with a financial professional and talk through inflation to ensure you have a workable plan.

Tweetable Quotes:

  • “We believe that good risk management is more important than trying to say you want to beat the market.”– Radon Stancil
  • “Oftentimes, the longer-term investments just keep up with the pace of inflation.”– Murs Tariq


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the Full Transcript:

Radon Stancil:Welcome everyone to our Retirement in Action Podcast. And today we’re going to talk about something that you hear about a lot these days, more and more numbers are coming out and that is inflation. And we are going to be particularly talking about inflation and how that will affect your retirement. Because most of the folks who listen to this podcast are folks that are on that path close to or already in retirement. And so it really comes down and it’s nerve-racking. And we’re going to talk a little bit about how to think it through, but it’s nerve-racking because you’re thinking, “Well, if things keep going up in cost, will I be able to continue to have enough money to keep up and how big will inflation get?”  
 And so we hope that what we’ll do today is walk you through some scenarios. This is not meant to be at all alarming. It’s just to say, “Hey, this is what inflation is. This is how it works. This is how you can put it into your retirement plan and have it help you have peace of mind.” So let’s just kind of go right into our topic here. And Murs, would you like to just talk a little bit about what inflation is, what it means? Because we hear the words, but really what does it mean?  
Murs Tariq:Yeah, yeah. It’s been in the headlines quite a bit recently, really all throughout the year of 2021. And to kind of set the stage as to why it’s so in the forefront of everyone’s mind just to kind of take us back to 2020 when we found out what this thing called the pandemic was and the government basically stepped in and said, “We’re going to pump billions of dollars back into the economy essentially to keep us afloat to keep everything from crashing, basically.”  
 And so that’s where this inflation conversation has come up. And in a simple way of putting it, inflation is basically the increase of prices in an economy over time so we’ve experienced it. You experienced it all the time. Sometimes you don’t realize it, but when it comes to things that we’re buying like groceries or the cost of filling up your tank at the gas station or the cost to buy an airplane ticket or even buying a car, that’s what inflation is. You see those numbers start to go up and ultimately it really comes down to this whole deal of supply and demand.  
 So in the 2020 pandemic, supply was running out considerably in a lot of different areas. We can all remember how hard it was to find toilet paper and how hard it was to find paper towels and all that stuff. And so there was a huge shortage and so for that reason, manufacturers were basically able to raise prices to kind of account for that shortage. So the steady increase of prices over time. And basically what that means is that our dollars just don’t go as far as they used to. The cost of things go up, our income stays relatively the same. And so our dollar in our pocket isn’t as powerful as it was the day before.  
 And there’s periods of inflation, there’s also periods of deflation that we’ve seen in our us economy. Back in 2009 was the last time that we ever saw deflation. Nothing major, but that was essentially your dollar got a little bit stronger. But what we want to talk about here is inflation has been painted a little negative in the headlines and everything, but inflation to a degree is actually good for the economy. It means that things are going well. It means that there is innovation. There is plenty of supply and plenty of demand and for that reason, prices are going up steadily.  
 What we hope along with that is that income starts to go up. If you’re still working, income is typically going to rise. Not quite with inflation, but you’re going to see that as well. So inflation from a broad perspective is good for the economy. But when we have higher levels inflation, what we’re kind of seeing right now that’s where people start to panic. And that’s why we decided that we want to address this today.  
 So that’s kind of the high level on what inflation is. Basically the rising and prices of goods and services. And so now I think, Radon, if we could, maybe let’s just discuss a little bit what causes it, what type of numbers have we seen in the past? And why is this in 2021 what we’re seeing? Why is this so alarming for some people?  
Radon Stancil:Yeah, a lot of times what we’ll do when we are talking with a client and we talk around this idea of inflation, we actually will pull up the last 100 years of the numbers. And what you’ll see is exactly what Murs said. There are years, there are periods of time where there were high inflation. There was periods of time. If you go back to the last 100 years where there were significant deflationary times, but if we average it out for the whole 100 years, it comes to a little over 3% on average. If you look at it for the last 10 years, it’s only about one and a half.  
 So we have been in a very low inflation period. But when you have certain things that occur, like what we just had and this is an easy one for you to think about because it’s so … did not happen very long ago. Think back to when we had the problem with you can’t even go buy toilet paper, right? Well, now what is it that’s there? Well, there’s heavy demand and there’s not a lot of supply. And when you have high demand, low supply, prices go up. That’s just the way it works. And because of the pandemic, because of employers not having the ability to make products at the rate they were making it prior to the pandemic, the demand is there, but the supply is not and that has made prices increase.  
 So when you think about inflation from that standpoint, it all makes sense. Now, do you think if you were to think about it, are we going to always have a supply problem? No. Things are starting to open back up. Suppliers are able to get workers back in. We do have a problem right this moment with employment. It’s a hard thing for people to get the employees they need. But as that supply comes back up that demand will still be there, but there’ll be able to buy whatever it is.  
 You’ll go into a grocery store and you’re not trying to find is something stocked. And so that’s really what we saw during the pandemic and that’s really what we have all the time. Think about this one. This is one that’s really common is housing. I want to buy a house and what are we seeing right now in our area? We’re in a position where people are bidding on houses. Why? Because the demand is there, but there’s not a lot of houses on the market. And so as much as we see that, that’s going to create a short-term inflationary period.  
 This year, we’re seeing a number that we’re hearing about of a 5% inflation rate, but it’s one year. It’s not going to change the entire retirement process just because of the fact that you got this one year of inflation. Now, what is the challenge with this inflation? The challenge especially for somebody who is close to or in retirement, if you’re working, your income goes up as cost of goods go up. You get raises because that’s just the way it works when we have inflation so that’s okay. If I’m in retirement though, I don’t get any more raises because I’m not working, I’m not getting that income like I was before. And so I have to make sure I’ve got a plan in place to protect me when I’m not working.  
 And so that brings us to where we are right now, which we just want to kind of tie all this together is what can you do to prepare for inflation in your retirement plan? Murs and I are always talking about having a good retirement financial plan. So what can I do in my planning process to protect or plan for inflation? So we’ve got really five things that we’re going to point out. These are five key elements and then we’ll go through these and try to explain them out. And Murs, can you start with number one?  
Murs Tariq:Yeah. So number one is and it’s just something to think about. If you have long-term fixed income investments. So I’m talking long-term bonds that are 15, 20, 30 years or treasuries or you’re in money markets or corporate bonds, whatever it is. If they’re very long-term, well, when you signed up for them there’s a coupon rate or some type of interest rate attached to them. But if we continue to have these inflationary periods a little bit higher than average, well, all of a sudden that long-term fixed income investment is not going to be as attractive as it was when you first bought it.  
 And so there’s some stuff that goes on in the background when you have a rising interest rate environment and how that can affect long-term investments as well. But the key here is you just want to double-check your investment plan when it comes to the fixed income side of the world. When we’re seeing higher levels of inflation, oftentimes the longer-term investments they really just can’t keep up with the pace of inflation. So just something to think about. Not saying that you shouldn’t have it in your portfolio, but just something to think about and maybe reevaluate with your advisor.  
Radon Stancil:All right, number two, you need to have good risk management for your portfolio. Good risk management for your portfolio. Now, why do we say this is so important? Well, think about it. The amount or the growth of my portfolio, the protection of my portfolio for a lot of our clients, that’s what’s providing them income. So if I have a period where the stock market takes away, 30, 40, 50% of my portfolio, I don’t have the assets there to continue to keep up if we do have inflation. So protecting that portfolio, we believe is primary. Murs and I are always talking about having good risk management in place.  
 In fact, we believe good risk management is more important than trying to say, “I want to beat the market, beat the S&P on the upside.” And we use this analogy all the time for people to get it. If you’ve got $100,000 and you lose 50%, how much money do you have? Well, you only got 50,000. Well, if the next year you make 50%, how much money do you have? Only 75,000. It’s much harder to make it back. You have to make 100% rate of return to overcome a 50% decline. And so not losing so much of your money is an inflation protection because I have my assets there to give me that income. So good risk management is extremely important.  
Murs Tariq:All right, the next one is think about what your guaranteed income is. So when we talk about guaranteed income, first thing that should come to mind is your Social Security. Some of you may have a pension, but the way that we look at expenses in general when we’re talking and planning for retirement, we make it pretty simple. We say, “Let’s know what our needs are, our absolute needs and then let’s know what our wants are.” And you couple those two together and that’s what your monthly budget basically is.  
 Radon and I, we like to have a decent portion, if not all of the needs portion covered by guaranteed income. So Social Security, possibly a pension. And then there’s other sources out there for guaranteed income. We’ve talked in previous episodes about these things called fixed index annuities and these things that guarantee lifetime income, and they can be inflation hedged or not. But ultimately, if you can cover a significant portion of your monthly budget by something that is fixed and guaranteed, now what happens is you can utilize the rest of your assets to be that inflation protection, to be that inflation hedge and it’s just going to sit there in the market.  
 And with that good investment plan, it’s going to grow. And then as you need to pull from it to cover that inflationary expense, well, you have that growth bucket working for you. So you’ve got some fixed income coming in the door. Social Security, pension, possibly an annuity that’s taken care of the bulk of your expenses. And then you’ve got a growth bucket that you can draw on as needed. And you couple those two together, you’ve got a really good inflation protected type of investment plan and an income plan basically.  
Radon Stancil:All right, number four, have a good spending plan. Now, what does that mean to have a good spending plan? Well, first of all, it just means have a plan. Murs and I when we talked to somebody, we say, “Let’s look at how much you’re spending.” People like spending plan more than they like the idea of a budget, but understand how you’re spending money. We talk about splitting income down into three categories. Number one, our essential needs. What I have to have every single month just to make it. I got to pay the light bill, got to pay the water bill. I’ve got to have food. I’ve got to do those basic necessities. Understand what those are, then look at my wants. I want a new car. I want to go on vacation. I want to do whatever I want to do.  
 And then my third category are legacy or giveaway money. I’d like to give the charity, I’d like to give to the kids or grandkids, whatever it might be. We call it legacy money. The essential needs though just understanding what that is. It is amazing when we sit down to talk to somebody and say, “What are y’all spending on a monthly basis?” And there’s really not a good concept as to what is being spent. So this is not saying overly scrutinizing exactly how every dollar, every penny, but it is saying, I need to understand what it is.  
 Now, a very good resource for this if you’re trying to figure out what is it I’m spending, where is it going? Because many of us today put everything on our credit card, pay the credit card off as a lump sum and you go, “Okay, well, I know I spend whatever, $4,000 a month on my credit card and then I pay it off.” “Where’s it going?” “That I don’t know. I don’t track that as good.”  
 You can use a free resource called Mint, M-I-N-T.com and it is a tool that if you link up your credit card or you link up your bank account, it will then start to break all of it down. Hey, you spent this much money on food, this much money on travel, this much money on gas just so you’re able to see it and understand it. So we would encourage you understand your spending plan.  
Murs Tariq:And the last one is to just sit down with your financial professional. If you’re working with an advisor, set a meeting with them and talk through this whole inflation concept. Making sure that we have a plan in place that’s going to work for that. If you don’t have a financial professional, I would consider reaching out to one. I mean, we are always talking with people about how we construct these retirement income plans. And I’ll tell you how we do it very quickly.  
 When we’re sitting down with someone that is interested in us and looking at us, we build out the retirement financial plan from the beginning before they even become a client because we see so much power in a properly, well-thought-out retirement plan. And it takes work on both sides. It takes work from the client, just like Radon was saying about figuring out what your expenses are, knowing where all your money is. And when we have all that information, now we can start saying, “Okay, well, let’s run this plan and let’s stress it out.”  
 So the way that we run it is we’re going to say, “All right, let’s not assume a crazy rate of return. Let’s just assume a very simple, essentially low conservative rate of return on the investments.” And then on the expenses side, we’re going to run inflation at that 3% that we were talking about. 3% we are very comfortable with. Why? Because in the last 100 years that we mentioned earlier, there’ve been periods that we’ve seen inflation in the 15% window, in the 12% window. And then you have lower years and all of that when you add all that together and combine and take that average, it’s 3%. So we’re very happy running it there. We believe that’s a conservative number.  
 And so at the end of all of this, we have a plan that is built out and it’s stressed out. A conservative rate of return, higher rate of inflation. And if the plan works out, well, then we’ve thought it through. If it doesn’t, well, then we’ve got some things to think about. Whether we need to be working longer or whether we need to be saving more or maybe picking up part-time work in retirement.  
 So what I’m getting at here is sit down with someone who really understands how to plan out the next 30 years of your life and ask them, “Hey, do we need to be thinking about inflation or is my investment strategy going to be working well with the rising inflationary type of period?” And then at the end of the day, you want a plan that’s going to work well within that too. So just some food for thought there.  
Radon Stancil:All right, everyone, we hope this has been helpful. If you’re looking or you’re listening to this rather and you’re thinking, “My goodness, that was a lot of points there.” Don’t forget to go to our website, pomwealth.net. We have a blog article written on this very topic of inflation and you’ll have all these points right there in writing. Also we do, as Murs said, you want to talk to somebody we do have the availability to do that. Just go on the website. You can see there a button. Click on the button that’s called 15-minute complimentary phone conversation. Our calendar comes up. You can schedule it right there. We’re glad to sit down and have a phone conversation with you.  
 Again, if you’ve listened to this podcast and you’re thinking, “Man, this is good information,” share it with a friend. We certainly would appreciate it. We hope you have a great week. We’ll talk to you again here soon.