Federal Reserve, Inflation and the Economy

We’ve seen a lot of headlines lately, as we’re sure you have, about the federal reserve, inflation and the economy. At the time of our podcast and writing this, Jerome Powell remains the Fed Reserve Chairman.

One thing we want to make clear is that throughout this article, we’ll be going over recent headlines.

Of course, at the time of reading this, we may have new information or outcomes for these headlines. But the good news is that the information should remain relevant.

What Jerome Powell Being Nominated as Federal Reserve Chairman Means

Jerome Powell is loved by some and not by others. There are two trains of thought here, and these are:

Side 1: People That Like Jerome Powell

A lot of people like Jerome Powell because he likes to print money. He wants to keep the economy moving aggressively, and for some people, they believe printing money will benefit the market.

Side 2: People That Dislike Jerome Powell

On the other side of the spectrum, there are concerns that printing money will cause long-term inflation, which is never a good thing.

Working as a Financial Advisor Through Federal Reserve Chairmen

Since we work with so many people nearly or in retirement, we get a lot of questions from both sides of the argument. For example, some clients want to invest heavily in the market because they believe that Powell will help the market soar, and others want to invest in financial vehicles that rise with inflation.

Our clients want us to forecast the future to try and determine what will happen if Powell is chairman.

For example, a client may ask us:

I’m concerned and excited about Powell’s reinstatement. Can we invest in something that protects against inflation and still reaps the benefits of the market?

Unfortunately, this is a loaded yet common question when dealing with inflation. What we believe is that two things need to be actively managed:

  1. Active investments in the market
  2. Overall retirement plan

Active management is important because trying to predict an outcome for an ever-changing market is a gamble. We would rather not gamble with our clients’ money, so we use the data that we have available at any given moment in time to make smart investment decisions.

Markets and investments can change rapidly in just a day or two, and active management helps our clients avoid major losses in the process.

We have a lot of passionate investors.

For example, some investors learn a lot about a particular company, love the direction and vision of the company’s CEO, and they put all their faith in this individual that they’ll help the company grow.

Unfortunately, there’s a lot of guesswork going into the scenario above that can lead to losses.

Through active management, we invest based on what’s happening now.

If inflation continues to rise and the pressure of inflation exists, we’ll adjust portfolios in three main categories:

  1. Equities, which are stocks
  2. Fixed income, such as bonds
  3. Cash

We recommend putting all three of these categories in a race to see who is winning in today’s market. At the time of writing this, equities are performing exceptionally well towards the end of 2021.

Using a number-oriented form of investing, we recommend:

  • Reallocating investments based on what’s happening now
  • Adjust as required

There are also some sides of the market where people would rather split their investments among the three categories above, so the investor may decide to invest 33% in all three categories and go with the flow.

Instead, we believe active management is the right choice because it reduces the risk of volatility.

Reactionary investing, based on headlines, is not something we recommend. Instead, use data and continue adjusting your retirement portfolio and investments to weather any changes in the market that occur today and 20 years from now.

Events Where Reactive Investing Never Works Out 100%

We’re not going to get political, but when there are presidential elections, there are many people who choose the doom and gloom path. If this Republican or Democrat gets elected, the stock market will CRASH.

Thankfully, these predictions rarely come true.

Making decisions based on assumptions never truly works out how a person thinks. We’ve been through many presidents in the last 20 years. One thing we’ve experienced, and it is rare, is that some people pull all their money out of the market because they believe a new president will cause the market to tumble.

Unfortunately, many of these individuals call us and explain how they wish they didn’t sit on the sidelines because their portfolio may have risen 10%, 20% or even more.

Another scenario is inflation.

Inflation is rising, so a lot of individuals are afraid and believe that the market will flop.

Emotions in the market rarely work out in your favor. As an advisor, we take emotions out of the market and our decisions. For example, even as surges in the coronavirus continue to happen worldwide, the markets remain strong.

Some investors feared that the market would suffer after each surge, much like it did when the pandemic first hit.

Using the data that we have available, we’re not seeing these surges impacting the market, so we recommend keeping money in the market. When the data changes, we’ll adapt our investments to minimize losses and maximize gains.

2020 Events and How We Shifted Money Going Into 2021

In 2020, the S&P 500 fell over 30%, but we did a few things:

  • First, most of our clients were sitting on cash to avoid losses in the market.
  • When reentering the markets, we took it slow and adjusted to the companies winning the race, such as technology companies.
  • January of 2021, we saw a shift where large-cap and technology started to slow and small and mid-cap companies began to revive as the market recovered. Using the race analogy, we adjusted portfolios to include more of these stocks to maximize client gains.

Since this was our first time living through a pandemic, we think we did exceptionally well for our clients and really solidified our thought process that active management is the way to go when investing.

Final Thoughts

We covered a lot in the past sections, and the sentiment remained the same: don’t react over headlines. If everyone could predict the future, we would all enter retirement ridiculously wealthy.

However, we can use the market’s data to make smart, timely investments and portfolio adjustments to avoid losses and ride gains to make the most of our investments as possible.

If you need help actively managing your portfolio or want us to run the numbers to see how we can help you grow your portfolio, schedule an introduction call today.

Inflation and Your Retirement

Inflation is a hot topic today. In fact, inflation is leading to the highest Social Security cost of living adjustment ever in 2022. For over 70 million Americans, they’ll have their benefits increased by 5.9% [1].

However, when it comes to retirement planning, there’s a lot of concern with inflation because many people didn’t account for inflation when coming up with their overall strategy to secure their retirement.

We’re going to be covering inflation and what it means for your retirement.

What is Inflation?

Inflation is a word that many people know, but they don’t really understand what it means in the whole spectrum of things. The term “inflation” relates to the increase in prices in an economy over time.

You’ve probably noticed the costs of the following items have risen:

  • Groceries
  • Automobiles
  • Gas 
  • Airplane tickets

In 2020, when the pandemic was running wild, the government pumped billions of dollars into the economy to keep everything running. Supply was a major issue at this time, so people couldn’t even purchase toilet paper.

However, manufacturers increased prices because the demand still existed.

Essentially, inflation makes your dollar worth less. For example, if you purchased a food item for $1 a year ago and it now costs $1.10, your dollar is worth less because you get less for your money.

Deflation also exists, but it’s far less common.

When deflation occurs, your purchasing power increases. 

Inflation is often portrayed as a bad thing, but it means that innovation is ongoing and that wages, hopefully, go up, too. However, with inflation rising rapidly like it is now, many people panic, especially in retirement or when employers aren’t offering salary increases to cover the cost-of-living increase.

Overview of the Inflation Over the Long-Term

When we work with clients, we like to go off of the 100-year average for inflation. Over 100 years, you’ll see a lot of periods of inflation and deflation, but the average inflation rate is just over 3%.

However, when you look at the last ten years, inflation has been at about 1.5%.

Since inflation rates over the past decade have been mild, it’s difficult to adjust to rising levels. If you think about the toilet paper crisis, high demand and low supply led to rising prices.

Thankfully, supply issues are easing, so we can expect supply and demand to equal out.

Another example of this is the housing industry. We’ve seen a lot of people’s homes going into bidding wars, with a lot of houses selling for more than they’re worth. However, this trend is expected to slow as inventory increases.

For people in the workforce, rising wages should help combat the rise in inflation.

Anyone who is already in retirement or planning to retire shortly will want to take additional steps to prepare for potential inflation.

5 Crucial Things to Consider When Preparing for Inflation in Your Retirement Plan

1. Long-term Fixed Income Investments

If you have long-term investments, such as government or corporate bonds (where the maturity date is 10, 15 or even 30 years), the long-term rates may not be as attractive as when you first purchased it.

Be sure to check your fixed-income investments, especially with high inflation, because they may no longer provide the returns necessary to cover inflation.

This doesn’t mean that you shouldn’t have any long-term investments like those mentioned, but you may need to readjust.

2. Risk Management for Your Portfolio

You need to have good risk management for your portfolio. It’s crucial to protect your portfolio so that if you lose 30% of it, you’re not struggling to make it back. A good analogy that we like to use is that if your portfolio drops 50%, you need to make a 100% return to recuperate your losses.

Let’s look at this with real-world figures.

If you have $100,000 in the market and lose 50%, you’re down to $50,000. However, if you gain 50% in the coming years, your portfolio is only up to $75,000.

It’s always better to protect your portfolio than try rebuilding it.

Good risk management protects against these losses so that they are minimal.

3. Think About Your Guaranteed Income

Guaranteed income is vital to your retirement, and this includes things such as:

  • Social Security
  • Pension
  • Etc.

If you know your needs and wants, you should have as much of your needs covered by guaranteed income. You should try and cover most of your expenses with guaranteed income so that you’re less impacted by inflation.

Growth buckets can help cover the increase in inflation.

4. Maintain a Good Spending Plan

Many people retire without any type of spending plan. Unfortunately, without a plan, you’re putting your retirement at risk. You should plan based on:

  • How you’re spending money
  • Essential needs (food, utilities, housing)
  • Wants (cars, vacations, etc.)
  • Legacy (charities, kids, etc.)

When you have a general idea of what you spend monthly, you can devise a spending plan. A good way to find out what you’re spending is to use Mint (it’s free), which will categorize your expenditures so that you can see and understand where your money is going.

5. Sit Down with a Financial Professional

If you have a financial planner that you work with, sit down with them and begin the difficult discussion of inflation and your retirement. When we sit down with clients, we do a few things:

  • Flush out a retirement plan before they become clients
  • Run plans and stress them out based on low rates of returns
  • Run plans at a 3% inflation plan
  • See how the retirement plan works through these tests

When we run tests for a person’s retirement, we can use the worst-case scenario and make adjustments based on this. For example, we may find that the person needs to work a few years longer or work part-time to retire.

Through tests and the help of a financial advisor, it’s possible to learn whether you have enough money for retirement and to stave off inflation.

Inflation will remain a consistent concern through retirement. Still, if you plan ahead and consider some of the points we’ve outlined above, we’re confident that you’ll be able to retire with peace of mind that you’re protected against inflation.

Do you want to follow an easy, four-step course that can help you secure your retirement?

Click here to access our FREE course, titled: 4 Steps to Secure Your Retirement.

Resources

  1. https://www.ssa.gov/cola/

How Does Inflation Affect Retirement?

Are you concerned about how inflation is going to affect your retirement savings?

There’s a lot of talk right now about inflation and how it’s going to change in the future. When you’re planning for retirement, this can feel like a curveball.

However, it’s no secret that inflation does impact your spending over time, especially when you’re no longer earning a monthly income. What can help is knowing how much it will impact your spending and what you can do about it.

In this post, we share everything you need to know about inflation in retirement. We illustrate how varying inflation rates can affect your savings over time and why you need to carefully consider your spending plan.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

How inflation has changed in recent years

Inflation can have a very real impact on your retirement funds, which is why we include it as part of your written retirement plan. But it’s important that we base the inflation rate on realistic, yet conservative figures.

To do this, we look at the average rate over the last 10 and 100 years. So, over the last century, the average inflation rate is just over 3%, which is why, when we build a retirement income plan, we set it at 3%. However, if you look at the average over the last ten years, it’s 1.7%. Therefore, we consider 3% a conservative rate as we expect inflation to be closer to the 1.7 mark.

Inflation and retirement planning

In this example, we’re going to talk about fictional retiree Cindy. Cindy is 67 years old, and she’s decided to retire now. She’s saved $1.5 million and receives $3,000 a month in Social Security.

Typically, there is a cost-of-living adjustment (COLA) with Social Security, which is somewhat tied to inflation. However, in this example, we are not going to include this adjustment or any other raise to Cindy’s Social Security benefits.

The key player when thinking about inflation in retirement is spending. Cindy plans to spend $7,000 a month in her early years of retirement. This is more than she plans to spend long-term because she wants to travel and do lots of activities while she’s able to. So, her initial spending in retirement will be higher than in her later years.

At age 67, Cindy will have to combine her $3,000 from Social Security with a $4,000 draw from her savings to provide her with $7,000 each month. It’s important to note here that we are factoring in a conservative 5% rate of return on Cindy’s savings.

How inflation affects spending

By adding 3% of inflation every year to her monthly spending after retirement, it’s going to require Cindy to gradually withdraw more and more from her assets. So, what does this look like year on year? Here’s how a 3% rate is projected to affect Cindy’s planned $7,000 spending each month.

  • Year one: $7,000
  • Year two: $7,300
  • Year three: $7,500
  • At age 80: $10,000
  • At age 90: $14,000

If Cindy wants to continue the lifestyle she has at age 67 through into her 80s and 90s, she’s going to have to withdraw increasingly more from her savings each year. Here, you can clearly see how inflation puts significant pressure on your savings.

In this scenario, at age 90, Cindy’s savings of $1.5 million have now dwindled down to just $56,000. With a monthly spend of $14,000, this is too uncomfortably low for us. But what if inflation isn’t as high as 3%?

How much difference 1% makes

If inflation was particularly high (around 3%) Cindy would know that she has to cut back on her spending in order to be more financially secure at age 90. However, if inflation was more in line with the most recent 10-year average (1.7%), what difference would that make?

If Cindy plans to spend $7,000 a month with a 2% inflation rise, she’ll have $765,000 left in her savings at age 90. This tiny tweak leaves her with a far more comfortable figure.

Now, we can’t choose inflation rates, but it’s important to see how much a 1% difference can impact your retirement savings. For Cindy, a higher inflation rate means she has to be more conservative with her spending, or she risks running out of her savings. But she also knows that if inflation holds steady, she can spend more comfortably for longer.

Changing your spending plan as you age

A key part of our roles as retirement planners is to help people like Cindy think through their spending. In Cindy’s case, she wants to spend more in her initial retirement years. She could live comfortably off $5,000 a month ­– the $2,000 is just extra.

Now let’s see what happens if we change Cindy’s spending based on this plan. In this example, we’ll add 3% inflation to her monthly spending of $5,000 and allow her 10 years of “fun money” – an extra $2,000 a month, with 0% inflation.

With this spending approach, Cindy would have $1.1 million left in her savings at age 90. Compared to the two other scenarios, this spending plan is more likely to give her peace of mind that her finances are secure for longer.

Navigating inflation in your retirement plan

This type of scenario is very common for our clients. People often plan to make the most of their first 5-10 years in retirement and then consider cutting back. We illustrate how spending and inflation affect our clients’ financial situations so that they can make informed decisions about their retirement plan. 

Inflation is a factor you need to take into account when planning your finances for retirement. However, it’s often not an issue to stress over. If you’re concerned about how it will impact your retirement, do reach out to your financial advisor or get in touch with us.

We offer a 15 minute complimentary call and can help put your mind at ease about inflation, saving for retirement, or any other questions you may have about preparing for retirement. Book your call with one of our advisors here.