Should You Be Worried About Stagflation in Retirement?
According to a recent poll by CNN, one third of Americans believe that the economy is the most pressing issue facing the country right now. That's not surprising as rising prices continue to hurt folks from the gas pumps to the grocery store and everywhere in between.
But could those rising prices be steering us towards stagflation? Many retirees are asking that question and worrying that their fixed incomes might struggle to keep pace with this challenging economic environment.
I don't believe that stagflation is an imminent concern right now. But I thought it might be helpful to draw some distinctions between stagflation and inflation and discuss some strategies for maintaining your standard of living throughout retirement.
Inflation is a decrease in purchasing power due to the rising costs of goods and services. An easy way to keep tabs on inflation is the consumer price index (CPI), which is released every month by the U.S. Bureau of Labor Statistics. Currently, the CPI is up 5.4% over the last 12 months.
So that's the glass-half-empty view of inflation: prices go up, and folks have a harder time buying things.
The glass-half-full perspective is that rising prices reflect a healthy economy that's continuing to expand. That growth is typically good for corporate earnings, which is usually good for Wall Street.
Of course, that's not very comforting for folks on Main Street who have been struggling to make ends meet. But as we've discussed on some recent podcasts and blogs, our hope is that many of the constraints that are driving inflation right now will start to ease in 2022. The news that younger children are eligible for vaccines could continue to drive down COVID-19 cases. Lower COVID-19 numbers will hopefully speed up businesses around the globe and work some kinks out of the supply chain. After the holiday shopping season, some consumer demand that's been pent-up since lockdowns could start to subside as well. And whatever your opinions on government spending may be, now that we're nearing the end of the debate on President Biden's infrastructure initiatives, we won't have as much lingering uncertainty about how much we're spending and on what.
Inflation is one of the symptoms of stagflation, which many retirees lived through during the 1970s and early 80s. But by the early 1980s, the rate of inflation neared 15%. As tough as things are for some folks right now, I haven't seen any indication that we're in danger of hitting double-digit inflation numbers today.
Another symptom of stagflation is "stagnant" economic growth. As I write this, the Dow Jones Industrial Average is over 36,000. COVID-19 and its associated supply chain issues stalled some of the growth we were hoping to see last summer, but our economy still grew 2% in the third quarter.
The final symptom of stagflation is high unemployment. According to the latest data from the U.S. Bureau of Labor Statistics, unemployment is down to 4.6% and the economy added 531,000 jobs in October*. The most pressing labor issue right now isn't unemployment, it's "The Great Resignation." Millions of workers who were displaced during the pandemic are either continuing to stay home or leaving their old jobs as they realign their priorities, health care needs, and professional goals.
Your financial plan
That's 0-3 on the stagflation checklist. So why are you reading so much about stagflation on social media and seeing so many stories about it on cable news?
Because "stagflation" sounds scarier than "inflation," especially if you remember the 1970s. The media loves to scare up as many clicks and viewers as it can. Unfortunately, far too many people let those scary headlines lead them to potentially disastrous financial decisions.
In any economic environment, coping with inflation during retirement should always be a part of a comprehensive financial plan. One strategy we use at Keen Wealth is to help clients prepare a bucket of reserves that can cover several years of expenses in the event that the stock market corrects. We also account for how Social Security payments will rise with inflation when we're picking the best time to start taking those benefits. And we look for advantageous moves to a client’s portfolio into various asset classes that we expect to help during an inflationary environment.
But the strongest safeguard against inflation is to filter out the noise and stick with the investment strategy you've worked out with your fiduciary advisor. With interest rates as low as they are, locking up too much of your cash in a savings account isn't going to help you keep pace with inflation. History tells us that folks who weather short-term market volatility and keep their focus on the big picture have an opportunity to build meaningful wealth and secure their ideal retirement.
For more information, we have some good resources on inflation and stagflation at KeenWealthAdvisors.com. We’d also be happy to answer questions you have on these and any other topics at your year-end financial review meeting. Call up Keen Wealth and let’s get something on the books.
*Total nonfarm payroll employment.
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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