By Brian Bloxom, ChFEBCSM
Inflation is an insidious villain, silently stealing our money’s purchasing power every day. We may not notice our loss until much later, perhaps when there’s a little less in our checking account than the month before, or when our weekly groceries only fill up three bags instead of four.
In a financial plan, the effects can, over time, be much worse, especially for those in retirement who depend upon fixed or slowly increasing incomes (think: Social Security or non-COLA (cost-of-living adjustment)-adjusted pensions).
Rising Costs Negatively Impact Income
Let’s start with income, whether you are still working or retired. Some of the largest money problems in the U.S. are rooted in our incomes failing to keep up with rising costs. Take college costs, for example. One of the chief causes for the massive amount of student loans today ($1.77 trillion as of Q3 2023 according to the Federal Reserve) was the disparity between stagnant wages over the past decade and college tuition inflation, which has averaged 8% annually, according to Bankrate.com.
This rate of increase not only dwarfs wage/salary COLAs, but most prudent college-saving investment vehicles as well. For parents trying to save and pay for their children’s college expenses, this type of inflation could ruin the best-laid financial plans.
Medical and healthcare inflation ranks right behind college tuition as one of the fastest-rising expenses, especially for retirees who tend to incur these costs more often than most other adults. According to Deloitte, a leading accounting and financial consulting company, from 2001 to 2021, healthcare costs increased a clip of 3.3% annually, nearly a third more than the average of all goods and services, and consumer incomes aren’t enough to keep pace.
Inflation also creeps into other sectors of our financial lives. From travel expenses, to purchasing a car, building supply and labor costs that add up into the price of a new home, each little tick up in inflation figures can compound into driving up the final cost of many of the goods and services we enjoy daily. It is for this very reason that the Federal Open Market Committee (Federal Reserve) has been so adamant about driving down the high inflation we experienced post-pandemic.
Wise Investments Can Curb Inflation’s Devastating Effects
On the asset side, inflation is a critical reason we need to invest our money wisely. As the post-pandemic years showed us, high inflation (and the accompanying high interest rates that arise as a result), can have a devastating effect on whether our investments (and purchasing power) are truly growing, keeping pace, or falling behind. For example, if inflation is cited as 6% but your bank CD or savings account is only yielding 3-4%, or your monthly pension benefit does not have a cost-of-living increase each year, the purchasing power of your money is falling behind.
Consider Inflation When Creating Your Financial Plan
For all these reasons, it’s critical to keep inflation in mind when creating your financial plan for the future, whether on your own or with a financial professional. Even with the many financial planning software programs available today, the inflation assumptions that may be used can vary considerably. Over the course of a 25-year retirement, the aggregate annual cost of a person’s retirement could double by one’s final years.
Whether you are in or entering retirement, or saving for other future goals, accounting for the rising costs of your lifestyle, even by assigning different but appropriate inflation assumptions to your expense categories, can help improve the accuracy of the results and the benefits of your financial planning.
Inflation never truly goes away for any of us over our lifetimes, so it’s vital to incorporate inflation and its effect on your plan in every financial consultation. Looking for a financial partner to help you pursue your long-term financial health? Sentinel Wealth Partners can help. Your position is unique. We’re here to help you ask the important questions and take the first step today. Reach out to us today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.