As we discussed on a recent podcast, one of the key factors behind the current market volatility is a concern about the rate of inflation. There haven’t been any definitive indications whether the Federal Reserve is as worried about inflation as some investors. But what the Fed does or doesn’t do in the next couple months, coupled with the effects of the new tax bill and the tariffs being weighed in Washington, may have a very real impact on market returns for the rest of 2018.
At Keen Wealth, we try to view these developments through a very wide lens and remind our clients that the long-term upward trajectory of our economy never follows a straight line. Today, I thought it might be useful to narrow our focus a little bit. Let’s look at how the rate of inflation affects your personal portfolio, as well as other factors that don’t necessarily make the headlines but can still impact your purchasing power in retirement.
1. Keeping pace with the inflation rate.
Even at 2017’s lower-than-average rate of 2.1%, year-over-year inflation can be significant over the course of retirement. People are living longer and their retirement assets have to last longer. And low inflation rates drive up the cost of goods over the course of retirement. In a typical 20- or 30-year retirement, this could have an effect on your ability to keep up with those costs.
At Keen Wealth, we encourage our clients to invest in assets that, hopefully, will keep pace with or exceed the rate of inflation. In addition, long-term care insurance or life insurance might help seniors cover the costs of rising medical expenses without breaking the bank in their retirement accounts.
We also educate our clients on investments as they pertain to their particular goals and situation. A savings account is a wonderful thing to have, but we believe that the compounding interest you’re going to earn over a lifetime of principled investing in equities is usually a more effective means of keeping up with inflation.
2. Your personal inflation rate.
The national inflation rate is important, but there are other aspects of your retirement that can have a more immediate impact on your purchasing power.
And not all inflation is bad. If you are planning on selling your home when you retire, an inflated housing market will drive up your home’s value!
But what happens when you move, especially if you’re headed out of state? Do you know how much property and sales taxes will be? How does the cost of living compare to your current budget?
What about your health care? Do you or your spouse have any long-term medical issues for which you’ll need to budget? If you’re planning on moving out of state, do you have a federal Medicare Advantage plan you can take with you, or will you need to shop for a new Medicare Supplement plan? What’s the cost difference going to be?
Then there are taxes to consider. Most people end up paying less in taxes when they retire. But if you have a generous pension waiting for you or gain an unexpected inheritance, you could find yourself bumped into a higher bracket. You’ll have to account for the higher taxes you’ll be paying.
Finally, what is your plan for annual withdrawals from your retirement accounts? Many of our clients spend more early in their retirement when they’re more active, and then reduce their spending as they settle into their 70s. Just as the old “4% withdrawals per annum” rule doesn’t work with these scenarios, thinking about the inflation rate as a straight line is a bit misleading as well.
These are just some of the costs that will affect how far your dollars go in retirement. General inflation certainly plays a part, but there are always other, more personal circumstances you need to consider that are closer to home.
3. Keep an eye on the Fed.
Short-term interest rates are still below where they were when Lehman Brothers collapsed in 2008. Even with the recent market turbulence, the economy is still chugging along at a good clip. So, if the Federal Reserve keeps rates where they are, then inflation could follow. If the Fed decides it’s in our best interest to stave off inflation, then it might raise short-term interest rates. That, combined with some of the other economic issues we’ve discussed lately, could lead to more market rumblings.
We considered the possibility of a modest interest rate hike when we made our 2018 projections at the end of last year. And with employment, wages, and the Fed’s projected annualized growth rate all headed in positive directions, we’re still expecting good things in the year ahead.
But a good financial plan that’s going to take care of you in retirement needs to account for inflation, and not just in 2018. If you’re not sure how your portfolio is set up to cope with inflation, reach out to us at Keen Wealth and we’ll take a look for you.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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