It’s that time of year, and Halloween is upon us again. As we near the end of October, I think back to this same time last year, right in the middle of the pandemic. Door-to-door trick-or-treating and crowded costume parties were out, and haunted forests and outdoor movie nights were in. “If screaming will likely occur, greater distancing is advised,” the CDC said.
We didn’t get any trick-or-treaters at the Cutter household, but the family did all hole up together to watch scary movies. Phoebe and Sophie picked the movies, and unlike the classics I was used to (think Psycho, the Birds), the girls landed on modern horror instead. The kind of movie that keeps you on the edge of your seat the entire time because you know something scary (and bloody!) is coming but you don’t can’t see it yet. I admit, the girls weren’t the only ones who screamed.
After our second movie ended, I felt like I’d had enough. The suspense was starting to wear on me. I decided that I’d had my fill of horror movies for a long time. But you know what else keeps people anxious and in suspense? Uncertainty. While the uncertainty of which character will get slaughtered next in a horror flick can agitate you, this feeling is relieved by the end of the movie. But in real life, and especially when it comes to our retirement plans, uncertainty can be much more troublesome.
While there will always be things outside of our control – think taxes, the volatility of the stock market, the future costs of healthcare – one area in particular creates a fear that can be difficult to solve for . . . Inflation. You see, inflation, and it’s probable effects on our purchasing power in retirement, is a major retirement obstacle for many. While we’ve been in a historically low inflation environment for years, that’s changing quickly, and not for the better.
So, this week with our time together, I’d like to dig a bit into what inflation is and why it’s so important to account for it within our retirement system.
At its most basic level, inflation means consumers can buy less with the same amount of money. The rate of inflation is measured by the consumer price index, which calculates the average change over time in the prices consumers pay for a market basket of goods and services. Inflation typically rises slowly, often unnoticed by consumers. During periods of high inflation, the effects can become more severe, triggering a cycle of rising prices and interest rates while the value of the currency falls.
Today’s inflation is caused by multiple factors, including a sudden demand for goods while supply struggles to keep up amid the pandemic, low interest rates and large amounts of cash in consumer pockets following government stimulus payments.
The inflation rate also plays an important role in determining the health of an economy. Countries with extremely high inflation rates are said to have hyperinflation and when this occurs the economy is often near collapse. But even moderate inflation can rapidly erode your purchasing power and create uncertainty. And since high inflation is detrimental to the overall economy but beneficial to the government (since it allows them to pay back their debt with “cheaper dollars”) the Federal Reserve has a constant balancing act to try to reconcile the government’s desires for higher inflation with the need for a healthy economy.
Even small but steady increases can leave retirees unprepared for the extended inflationary environment that may be ahead as inflation rates rise in the U.S. In fact, over the past year, the rate of inflation rose to 5.39% – the largest 12-month increase in the consumer price index since August 2008.
Now, if this rate of 5.39% remains as the peak, it will still be lower than the 5.60% Oil Peak of July 2008, which was lower than the October 1990 peak at 6.29%, so the trend will still be down. However, if inflation makes another run-up above 5.60%, that could indicate a trend change toward higher inflation. This all points to the need for pre-retirees to take inflation into account and create hedges against it, whether inflation steadies or continues to ramp up in the coming months.
I believe we’ve been so used to an extended period of time with relatively low inflation that we’ve gotten complacent. We’re starting to see it now, and this is surprising a lot of the people I meet with each day. They wonder, is this the new normal or is this just transitory?
So how can you prepare your retirement system for the unknowns of inflation, both before and after you retire? Well, start by just maintaining a budget. This will help you see where you’re spending your money, which can also help you to spend less than you earn.
If you plan to purchase an item that is severely affected by inflation, consider delaying this purchase if you can. And this would be a great time to reassess your investment strategy. If you have not incorporated downside risk mitigation techniques into your strategy, folks this would be a great time to reassess your risk budget and your process. You must consider investment strategies or source of retirement income that have the ability to increase with inflation to help maintain your money’s purchasing power.
As inflation rates rise and fall, focus on the things you can control and know that you’re taking the right steps to manage the uncertainty that inflation brings. Trust me, once you have a solid retirement system in place, one that manages the downside so the upside can potentially take care of itself, inflation is a lot less scary!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week and Happy Halloween.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached at email@example.com.