Inflation. It’s quite the buzzword right now, but it’s something I’ve talked about my entire career. Like many CFP’s, I’ve been projecting 4% inflation in my financial plans for the last 25 years. While this number was correct at the beginning of my career, it became an inflated (no pun intended) number itself in the last 5 years or so. People would laugh when I showed them the projected income needs 30 years from now and also didn’t believe the projected asset levels during the same time period. Sitting at a current 6% inflation rate, who’s laughing now?
What exactly is inflation? Inflation is a measure of the overall impact of price changes, for a diversified set of products and services, and allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time. Say that five times fast.
Most people feel inflation is bad: Rising prices means our hard earned dollar buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth. Which in turn can be bad for the stock market.
When can inflation be good: The value of physical investments tend to rise such as real estate, commodities, artwork, precious metals and stones. In conjunction, there tends to be an increase in wages and savings rates for risk adverse investors. As a currency loses value, it can spur spending today as prices may be higher in the future….thus leading to an increase in profits which in turn can be good for the stock market.
So why is inflation such a big deal when it comes to retirement planning?
As a financial planner, I live in a world of projections. My job is to estimate today how much you will need in 20-60 years taking into consideration the impact of inflation and the compounding effect of an investment portfolio. Easy, right? Thank goodness I have advanced planning software to do the heavy lifting for me, but it’s still me that is doing the data inputs. Most importantly the projection of inflation and the assumed rate of return. These two variables, combined with account balance, savings strategies, time horizon and income need in retirement, are all the key ingredients to projecting a retirement plan accurately.
Inflation isn’t necessary the end of the world when looking at our overall investment portfolio, we just need to plan for it.
Kimberly Enders CFP® CWS® CERTIFIED FINANCIAL PLANNER™
Enders Wealth Management
37800 Van Dyke Ave, Suite 125
Sterling Heights MI 48312
www.enderswm.com
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