By Shawn McGuire & Matthew Gaude
Inflation operates like a sneaky thief, quietly eroding the purchasing power of our money day by day. Its impact might not be obvious until we realize there’s less in our account than before, or when our weekly groceries don’t stretch as far as they used to.
In financial planning, the impact of inflation can be even more severe over time, especially for retirees relying on fixed or slowly increasing incomes, like Social Security or pensions without cost-of-living adjustments (COLAs).
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 among different asset classes. 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.
Incorporate Inflation Into Your Financial Plan
Inflation is a crucial piece that should be considered in your financial road map, whether you’re doing it solo or with a financial advisor. Despite the multitude of financial planning tools out there, inflation assumptions can vary widely among them. Over a 25-year retirement span, it’s possible your yearly retirement expenses could double by your golden years.
Whether you’re already retired, nearing retirement, or saving for future goals, factoring in the escalating costs of living—by adjusting inflation assumptions for different expense categories—can enhance the accuracy of your financial plan’s outcomes. That’s why we include a general inflation increase of 3% annually, healthcare cost inflation of 6% annually, education cost inflation of 5% annually, and Social Security cost inflation of 2% annually. We adjust the increase (or decrease) in each category annually based on the current inflation numbers for each category. We would rather have slightly higher inflation numbers to recognize the impact on your financial plan over time than understate future costs.
Inflation affects us all throughout our lives, so it’s essential to address it in every financial discussion. Seeking a partner to navigate your financial journey? Look no further than Live Oak Wealth Management. Your financial situation is unique, and we’re here to guide you through the process. Take the first step today by contacting our office at 770-552-5968 or email [email protected].
About Shawn
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER® professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
About Matthew
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.