Ep. to 164 – How to Plan for Inflation in Retirement

How does inflation affect your retirement? We’re currently experiencing high inflation due to a number of reasons and it’s only wise to know how to plan for it in retirement.

In this episode of the Secure Your Retirement podcast, we talk about the current inflation rate, its causes, and how to protect yourself in retirement over a glass of Chardonnay la crema wine. We explain why the current inflation is short-term, why you should consider having an active retirement approach, and a Roth conversion.

Listen in to learn how to have a worry-free retirement plan by ensuring you have the cash, growth, and income buckets.

In this episode, find out:

  • The low supply chain issues causing the current high inflation rate.
  • Why you don’t need to be alarmed by the current high inflation because it’s short-term.
  • How to protect yourself against inflation by having an active investment approach.
  • The two scenarios that exist for you if your retirement plan is tight during inflation.
  • Understanding past inflation data and why we believe it’s going to come back to normal.
  • The different ways you can prepare your spending plan as a retiree during inflation.
  • How to have a worry-free retirement plan by ensuring you have the cash, growth, and income buckets.
  • Why you should consider a Roth conversion to have a tax-free vehicle to tap into in retirement.
  • Talk to an advisor to understand the tax implication of a Roth conversion before going for one.

Tweetable Quotes:

  • “Having an active approach can get you out of harm’s way in certain scenarios…rather than just having a buy and hold mentality.”– Murs Tariq
  • “If you want to have a peace of mind retirement or a worry-free retirement plan, make sure that you have the cash, growth, and income buckets.”– Radon Stancil 


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:Welcome everyone to our Secure Your Retirement podcast. Today we’re very excited to talk to you because it’s our wind down. But before we get into the wind down, I want to tell you what we’re talking about and that is inflation. Maybe you’ve heard, maybe you’ve not inflation’s a big topic right now and it would be impossible for you not to know it because we’ve seen great big price increases on a lot of different areas.  
 So how does inflation affect your retirement? This is a retirement focused podcast so we’re going to talk about inflation around retirement. But before we get into that and give you the agenda, which by the way, it’s power packed. I just want to tell you about the wine we’re drinking and the reason why is it’s the last Monday in June. So it’s a wind down. So Morgan, could you tell us about our wine?  
Morgan:Yes. So we don’t usually do Chardonnays, but this is one that I’ve always liked. It’s La Crema, it’s a Sonoma coast Chardonnay and it’s good and rich and buttery. It’s one that I like and it’s easily accessible at grocery stores.  
Radon:You know what we do is on wine down days, we pick the topics that you need to have a little bit of wine in order to talk about it and inflation’s one of those topics. So Murs, what do you think of the wine? Just in case somebody’s thinking what they want to do whenever they’re thinking about inflation?  
Murs:I think the wine is pretty good. It tastes very smooth. Chardonnays, I’ve been told, that they can cause headaches more than some other white wines, which also inflation can too. So I think this is going to match up really nicely.  
Morgan:Hand in hand.  
Radon:All right. Good deal. So, Morgan, can you give us an outline of some of the questions that we’re going to consider in this episode?  
Morgan:Sure. We’re going to talk about the causes of inflation, what we can do to protect our savings or retirement against inflation, what you should think about when deciding to retire, how should you prepare your spending plan and also can an income bucket help with inflation. Finally, should I consider Roth conversions?  
Radon:All right. So you can see there’s a lot of things that we’re going to hit. We’re going to go through these pretty rapid fire. So hang in there. There’ll be an article on our blog that’ll go through all these questions as well. So can we get started with our first question?  
Morgan:Sure. So what causes inflation?  
Radon:So I’m going to talk about it from the perspective of what’s causing this instance of inflation. There are a couple of different things that can cause inflation. Many times people have been concerned over the years that with the government printing a lot of money that that within itself can cause inflation and it can. The reason why is it dilutes the value of the dollar, which means I have to spend more dollars to get the same thing I would’ve gotten earlier. The reason why it’s devalued is because there’s been printing of money.  
 Now in this particular instance, it’s kind of related to the printing of money. But ultimately what we’ve had is we have had extra money, but because of the pandemic, we also now have had lower supply, meaning we have supply chain issues, but we don’t have demand issues. Meaning we still need these things. We still need cars. We still need gas. We still need things that we would get at the grocery store just to live. When you have that demand but the supply is low, it automatically goes into a price increase. so we’ve seen that.  
 We’ve had now in particular with gas, we’ve had a couple of issues. You got the pandemic that got things started. Then you have the Russia invading Ukraine. Well that affected the supply chain of oil or gas and so therefore we’ve got higher gas prices. Now we could have an argument all day long as to whether or not we really have a supply problem, but that doesn’t matter. The perception is we can’t get it as readily as we could have gotten it prior.  
 You could take other things. We were just talking about it. We had lunch today and we were talking about how expensive it was to have our tires changed on our car. Why? Well because there are again, supply chain issues where you can’t get some of the products and so what occurs just naturally is to say, okay, we’ve got these tires. We’re going to have to raise the price in order to continue to make some profit because we’ve got less volume on our tire sales. That’s just the way that works.  
 Now, by the way I am right now in the process of booking a flight for a meeting that we’re going to. Prices are the highest I have ever seen them to get on an airplane. Why? Couple things there. Again, it’s all come back to supply, but you got higher gas prices and also the airlines, because of the pandemic, put some of their planes on the sidelines. They don’t have the staff and so there’s fewer flights. That means there is less supply, but the demand is still there. I still have to go to this meeting. We’re still going to go no matter what. So we have to spend more money and that’s really where we set today.  
 Fortunately, what we’re seeing though does not appear currently to be something that’s going to be long term. The supply chain issues will get fixed. We’ll see these things balance out, which means the pricing will balance out. Will it go back to where it was? Probably not, but it just won’t be quite as high as we see it today. By the way, if you think back into our very short history, we had high gas prices before and they came right down. We’re back into this little cycle though, with all what’s going on, that is a problem. But if you think about it from the supply chain issue, if we can get supply back up, which it is going back up, prices will come back down.  
 So this is short lived and we’re going to talk about a little bit of the history of inflation in one part of our conversation. But for right now, let’s just look at this as a short term event. When we look at the last hundred years, we’ve had times where we had high inflation, we’ve had low inflation. We’ve had a decade of very low inflation. So now we’ve got this little snap shot of a window that is high, but at this point it should not be making us over the top alarmed in our opinion.  
Morgan:So wine prices will go back down.  
Radon:Yes, they’ll come under control.  
Morgan:That’s what I was concerned about. So Murs, what can we do to protect our savings or our retirement against inflation?  
Murs:So as far as protecting yourself against inflation, particularly your retirement assets, I think there’s really two categories when it comes to investing. One is a passive approach. One is a more active approach. A passive approach is just going to ride the markets up and down no matter what’s going on. There are certain asset classes that are going to do better in an inflationary environment, but if you don’t have that active approach and you’re more of a buy and hold, well, you may be missing out on that type of situation.  
 So what we believe in is a little bit more of an active approach. Let’s be in things that are working and we’re going to see that very quickly. It goes back to what Radon said about supply and demand. When you’re talking about what’s causing inflation is that supply and demand. There’s also supply and demand inside the stock market and that’s what we’re monitoring every single day. So there are certain places of the market that are going to do better in an inflationary type of window than other things are.  
 So if you take the most popular type of portfolio, which is a 60/40 portfolio, you’ve probably heard about it. You’ve probably read about it. It’s touted as one of the go-to for retirees. 60% in the equity side of the world, 40% in the bond market fixed income side of the world. Because of what we’re dealing with right now, that 60/40 methodology has become very risky and the reason is that 40%, that bond side of the arena, which is supposed to bring you that safety, supposed to bring you that income and protect you from the 60%, the equity side, well because of rising interest rates, because of inflation, bonds have suffered tremendously. Especially in 2022. There’s been issues in 2021 and 2020 as well, but we’re seeing it very heavily right now.  
 So that 40% that is supposed to keep you safe is actually hurting you almost as much as what the actual equity side of the market is hurting you. So we believe having an active approach can get you out of harm’s way in certain scenarios. You can be sitting in cash, you can be sitting in different places of the market, rather than just having this buy and hold mentality of I’m just going to have a well-diversified portfolio and I’m just going to ride the ups and downs. We’re seeing with that 60/40 type of mentality, while it has worked in the past, it’s worked just fine. The markets are changing. Inflation is something that we’re dealing with right now and having an active approach can be very beneficial in this world of unknown that we’re living in right now and for the next few years until some of this subsides.  
Morgan:So how does this affect your plan of when you decide to retire?  
Radon:There’s a couple different scenarios there, but I will say this. If we were helping somebody plan for retirement and we were looking at their retirement plan, which we think everything should start with a comprehensive retirement focused financial plan. When we are looking at a plan that’s on the edge and maybe they’re saying hey, I don’t think I can cut my spending. It might be one of those scenarios where if you needed to delay, not retire right now and maybe make it one more year, that could probably make sense. Very rare have we ever had to say that, but right now might be one of those times.  
 Now, if you’ve been a really good saver, you can control your spending, which we’re going to talk about a little bit about what that means on control spending. But we could control our spending in the short term, it wouldn’t affect you at all. That’s the beauty of a retirement is I have flexibility in how I spend money and we’re going to talk about that in a moment. But for right now if you’re tight on that plan, meaning you’re on the edge, you were thinking about retiring and you were trying to do it early, it might be one of those years where we do one of two things. One, we delay retirement for maybe a year or two. The other scenario, which is in the middle, which we’ve had a lot of clients do this is they retire from the stressful full-time job. Then they take a consulting or part-time job to supplement for a couple of years.  
 So that’s really probably what we might want to think about right now. Now that’s not across the board. That is only if our plan is very tight where we really didn’t have a lot of wiggle room. If we were not in that scenario, it’s not going to affect us at all and so that’s one of those things that we would need to consider on a case by case basis.  
Morgan:So you mentioned the spending plan. How do you prepare your spending plan when it relates to inflation?  
Murs:So we’re getting this question all the time of inflation’s running at eight, nine, 10%. So is this what I need to be planning for the rest of my life? We were very quick to say yes, this is a very tough time right now with inflation at the gas pump, at the grocery store. We’re all feeling it. We’ve been through a rough couple years as far as what the world has had to go through, what the economy has gone through. So now we’re feeling the effects of inflation. So the question becomes, is this what it’s going to be like for the rest of our lives? The answer is no.  
 The reason I can confidently say that is because we have history behind us. So right now, yes, we’re running at that seven, eight, 9% inflation. The government’s already saying, the Fed is already saying we’re going to take some pretty aggressive measures and they’re becoming more and more aggressive as to interest rate hikes to curb inflation. So we know that they’re doing what they can do and they have mechanisms that they can use to bring inflation back down, and they have a target that they want to hit.  
 But you got to realize also for the last 10 years, we’ve been a little bit spoiled when it comes to what inflation has been. Inflation over the last 10 year, the average has been 2.15%. We’re running right around that nine to 10% right now so that’s a significant jump. But what’s interesting is if you look at the last 100, 108 years actually is the data that we have, and you go and think about the last 108 years. You’ve got some significant periods that you have all lived through, where you felt it just like you’re feeling it today at the gas pump, travel, groceries, whatever it was. We’ve seen periods during that where we’ve had 11% inflation. We’ve had multiples in the teens up in the high 5, 6, 7, 8, 9s for a decent period of time. I’m talking mainly about the late seventies and into the early eighties where we saw 11.3, 13.5, 10.3% inflation.  
 So if we take all of those as an average and we bring it back down, what is that average over the last 108 years? It’s 3.24%. So when we were living back in 1981, it was 10.3. The assumption was not hey, is it going to be 10.3 for the rest of our lives? The government’s going to do things and the whole idea is that there are going to be ebbs and flows, but it’s going to come back into some type of normalcy.  
 So when we’re talking about building out a spending plan for retirement, well, we want to think about what do we want to do? What do we need to have to live and what do we want to do in retirement? That’s how we break it down, essential income needs and your wants. We got to understand what those numbers are and then build it into this retirement financial plan that Radon was talking about.  
 Then we can start to play with it a little bit. What if inflation does run a little bit higher? Are we going to be okay? If we’re not, then what are we going to have to do? Well, we’re going to either have to maybe come up with some additional income, like part-time work that Radon was talking about, or we cut our expenses a little bit. What’s beautiful about the retiree is that the retiree has the ability, and we see this all the time, to circumnavigate some of the expenses in life. What I mean by that is so compare the retiree that doesn’t really have a schedule. I know you probably have to commit to taking care of the grandkids and doing certain things, but you don’t have the schedule that you had back when you were working that 9:00 to 5:00 job, or really tied to a certain timeframe.  
 So say you want to go on a trip. Well, you could say, well, I’m going to travel when not everyone else is traveling. I’m going to travel when it’s more affordable to travel, versus when I was working I could only travel when the kids were out of school and during summer vacation, which happens to be the most expensive time to travel when everyone else does travel. So for retiree, we can control that a little bit, which is in your favor when we’re having this whole inflation conversation. So how should you prepare your spending plan? I would say prepare it well. Think through all the different things that it takes to keep you alive and also keep you happy in retirement and then talk to somebody and say hey, does this actually work? What are the things that we need to be thinking about?  
Morgan:Good stuff. What about an income bucket? How does that help with inflation?  
Radon:So we talk all the time about having three buckets. One is your cash, meaning I got to get to my cash right away. The other is my growth bucket. That’s where I’m invested in the stock market. Then we’ve got an income or safety bucket. If we have the income bucket set up and it’s set up to provide my income where I don’t have to think about what’s happening in the stock market, or what’s happening with growth because that income bucket is there, then I don’t have to think about inflation. I don’t have to think about what’s going on in the stock market because as we have inflation, or we have a recession, there’s going to be volatility in the stock market.  
 Imagine you’ve got a retirement plan where the income that you need for the next 15, 20 years is fixed. I don’t have to worry about it. It’s just going to come in. It’s not relative to the stock market. It’s not relative to inflation. I just know I’m getting that income. It takes all the worry off the table. So if you want to have a peace of mind retirement plan or a worry free retirement plan, make sure that you have those three buckets.  
 What were they again? There was one that was cash. The other one was growth. That’s basically investments that can grow very well, but could have some volatility. The third one is making sure that you have an income or what we would call a safety bucket. That is extremely important. So if you’re thinking about it and you’re going I don’t think I’ve got three buckets, you’re going to want to make sure that you do a little bit of investigation on that.  
Morgan:What about Roth conversions? Is that something you should consider?  
Murs:So the answer blatantly is yes. Everyone should always consider a Roth conversion. Does it always make sense for everyone? No. By the way, the Roth conversion, the concept here is taking pre-tax assets like your traditional IRAs, your 401ks, anything that you’ve not paid taxes on. The event is basically you convert it into a Roth account and the only way to do that is you pay taxes on that money. So say you have $100,000 401k, and you say I want to convert half of that into a Roth. You’re going to add $50,000 of income to your bottom line for that taxable year. So it’s not something that you want to make a quick decision on. You want to understand the tax implications of a Roth conversion, but yeah, the idea is hey, potentially tax rates are going to be higher in the future, or my income’s going to be higher in the future. So it would be nice to have some tax free vehicles to tap into down the road into retirement.  
 Now with inflation, what has resulted somewhat as a byproduct of inflation is what we’re sitting in, in June. The markets have come back or have pulled back anywhere from 20 to 30%, depending on what index that you’re looking at. So if you’re down significantly or more than you’re used to, well the silver lining of that is now there is an opportunity as far as a timing perspective to do a Roth conversion.  
 Why? Let me paint you this picture. Say you have $100,000 IRA. You’ve never paid any taxes on that money. Let’s just say that the market fell 50%, you fell 50%. So now you have a $50,000 IRA. This could be a good time, if the taxes make sense, to do a Roth conversion. Why? Because either way when the market starts to go back up, that $50,000 is going to grow. But now you have the ability to do a much larger percentage of your IRA assets as a conversion. So take this picture, say you had that $100,000 IRA and say I want to convert $20,000 of that money. Well, that’s 20% of that account. Say that 100,000 goes down to that 50,000 like I was talking about, but the taxes are still the same if you want to convert 20,000, but now the percentage of your IRA is significantly larger. Now it’s 40% versus 20% of your IRA.  
 So converting in a down year can be very, very advantageous. So let’s say you do convert that 20,000. Now you get the market running right back up and now that 20,000 goes back up to 40 or 50,000, and now that’s all tax free growth. So it is something major to consider. The biggest part of that is going to be the taxes that you want to talk to somebody about. Say hey, does this even make sense for me? Then obviously the most opportune time is what we’re sitting in right now, a down market. So definitely it should be considered. Don’t take it lightly and talk to somebody to get some advice.  
Radon:All right. Well, we hope that what we have been able to share with you on this idea of inflation in retirement has been helpful. By the way, we went through a lot of information. If you got through this information and you’re thinking, oh my goodness, that’s just overwhelming. Go visit our website, which is POMwealth.net. Go to the blog page and right there you’ll see an article written on this topic, inflation in retirement. You’ll understand or be able to read through and comprehend it maybe a little bit better.