If you have noticed half-empty shelves at the grocery store, that gas prices have doubled over the last two years, and that putting a nice ribeye on the grill is getting really expensive, that’s what economists call inflation. On average, according to the Bureau of Labor Statistics (or BLS), the cost of living has been increasing at a rate of almost 8% over the past 12 months. That’s the highest number recorded over the last 40 years. The inflation rate we got accustomed to in the last 30 years or so is much closer to 2% a year. Inflation is particularly worrisome for long-term investors because even a 1% lower return due to inflation can make a large difference over long periods of time. Inflation can be particularly damaging for retirees or endowments that rely on an investment portfolio to generate regular income.
In this post, we collected a few articles that help you understand inflation, what it may mean for your financial plan, and what you can do about it. We also included a couple of pieces on savings and on tax-efficient spending strategies. These tips and strategies are always valuable, but they become even more so in periods of elevated inflation. Happy reading!
What is Inflation and What Does it Mean for Your Plan?
Before panicking about inflation and making any drastic changes, however, it is helpful to understand how inflation works and how it can impact your investment plan. Following is a brief look at inflation and how you can plan for it. [Read more]
The Federal Reserve, Monetary Policy, and Your Plan
The Federal Reserve Bank (“the Fed”) has been in the spotlight since the start of Covid-19, taking a number of actions to help the economy weather the pandemic. You have heard about easy money, zero interest rates, reverse repos, quantitative easing, and you may wonder what it all means for your investments, particularly with inflation making headlines again when we thought it was a thing of the past. Let’s review the tools the Fed uses to control inflation and evaluate them in the context of a financial plan. [Read more]
Unexpected Inflation and Real Stock Returns
A common investment thesis is that stocks are part of “real assets” and should protect long-term investors from inflation. Corporate profits should increase by the amount of inflation, and since stocks represent the claim to future company profits, the value of stocks should also increase with inflation. As a result, real stock returns (returns adjusted for inflation), would be unaffected by inflation. This theory relies on the assumption that money has no real impact on the economy. But does the theory hold in practice? And what does it mean for your investments and your plan? [Read more]
Unexpected Inflation and Sustainable Retirement Income
Inflation is one of the major known risks for retirees or those approaching retirement. Even when low and stable, inflation can substantially reduce the purchasing power of a nest egg over long periods of time. But low and steady inflation is easier to plan for. When inflation is unusually high, however, it can create additional risks for anyone relying on a portfolio to generate income. Unexpected inflation can lower the real return (after adjusting for inflation) that investors can expect to earn on their investments, and can exacerbate what is known as sequence risk. Sequence risk refers to the oversized effect that lower than expected returns in the first five to ten years in retirement can have on the ability of a portfolio to generate income for long periods of time, like common retirement horizons of 25 years or more. [Read more]
Three Steps to Generate More Income from Your Retirement Savings
With inflation eroding the purchasing power of your nest egg, it is all the more important to be mindful of the tax consequences of how you generate your retirement income. The goal is to be as efficient as possible to get as much as possible out of every dollar you saved. Most retirees rely on multiple sources of personal retirement savings to generate retirement income. Besides Social Security, they typically rely on a combination of savings from tax-deferred accounts (TD), like 401(k)s and traditional IRAs, taxable brokerage and savings accounts (T), and tax-exempt accounts (TE) like Roth 401(k)s and Roth IRAs. The question is, in what sequence should we withdraw from the various accounts to generate more retirement income or make the portfolio last longer? Research shows that different sequences can have a big impact on the longevity of your savings. Take a look at our three-step approach. [Read more]
Set Savings and Spending Goals with the 50-20-30
In periods of high inflation, it is a good time to review your savings and spending pattern. How much you contribute towards your goals (your saving rate) is a key determinant of financial success, more so than your investment returns. However, disciplined saving is hard to implement, particularly with many competing needs and wants, and a busy life. One tool to help you get started is the 50/20/30 rule. In this post we break down the rule and suggest ways to implement it. [Read more]
Tips and Tricks to Help You Save More
How can you save money while still taking care of your basic needs and everyday expenses? It is a fundamental question and it may feel overwhelming at first. However, you can take steps to put your spending and saving goals into the right perspective, and start moving in the right direction to achieve your goals. Here are some tips and tricks to help you do it. [Read more]
Massi De Santis is an Austin, TX fee-only financial planner and founder of DESMO Wealth Advisors, LLC. He is also a lecturer of finance and economics at Texas State University. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow, and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
