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Inflation Doesn’t Have to Destroy Your Retirement If You Don’t Let It

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Ben Fuchs. Courtesy photo

By Ben Fuchs

Timing, as the saying goes, is everything. For those who are on the brink of retirement, considering how to assure a stream of income sufficient to cover costs they expect to incur through their retirement years, the arrival of nearly unprecedented inflation is most unwelcome.

The consumer price index climbed 7% in 2021, the largest 12-month gain in nearly four decades, according to U.S. Department of Labor. Predictions vary on when prices will moderate and inflation will drop back to Earth from the stratosphere.  Some economists estimate inflation will just slightly exceed 3% by year’s end, others disagree.

With inflation and uncertainty appearing to prevail for at least awhile, what is someone nearing retirement to do?

Consider that the 100-year average for inflation is approximately 3.2%. But a 100-year average does not necessarily help you right now, or even in the immediate future. If you hold a large position of cash, for example, earning about 0.5%, continuing inflation is eroding your buying power. It is likely one cause of why you may either run out of money or leave a significantly smaller legacy than you had hoped. Fortunately, it’s also one of the easiest mistakes to fix, replacing that cash with a number of possible investments depending on personal risk tolerance and liquidity needs.

Predicting when inflation will rise to such heights again is an uphill task even for the most illustrious economists. Your objective, however, is to develop a retirement plan that that aims to provide sufficient financial security, which underscores the need to consider not only the interest you’ll earn on your money, but how much of your money’s purchasing power can be diminished by inflation. For those with significant positions in money markets, CDs, savings, certain bond funds and stable value funds, it is worth a second look.

Having conducted educational seminars relating to retirement many times, in many different economic environments, I would inevitably be asked the question: “Should I rent or buy in retirement?” Considering the alternatives makes sense – and renting has a tremendous amount of appeal. If something breaks, call the landlord to fix it. If part of a tree falls down on the property, call the landlord to take care of it. If I want to move somewhere else, you just get up and go!

But here is the problem: longevity. On average, women who reach the age of 65 have a better than 50% chance of reaching age 85, men slightly less. Do you remember the cost of your first car, and the difference in price 20 years later?  By renting, you give up control of your costs. If there is a spike in inflation like we’ve recently seen, you may never be able to get back into the housing market. You may be forced to move time and again, as prices rise, because you can’t afford to live like you once did. It’s important to always have assets that will gain with inflation, and real estate has historically been one of the best.

In retirement, you are likely not to be working and earning new dollars. So the dollars you’ve put away need to go as far as they can for as long as they can. That’s what providing financial security is all about.  Navigating that process, weighing the possibilities and outlining the alternatives, is precisely what an effective, experienced financial planning expert can help you to accomplish.

At the outset of this article we noted that timing is everything. That is also true as you look ahead to, hopefully, decades of retirement. You’re not likely to need to tap all your savings at the same time, so a diversified portfolio, which considers your anticipated income needs over time, savings and assets you have put aside, and how much volatility you are comfortable with, can help to guide your decisions. Get the best understanding possible of what your financial needs are likely to be in retirement, and plan accordingly.

When inflation is climbing rapidly, as it has been lately, your money is worth less today than when you earned it, or set it aside in a bank account. That is why, when creating retirement income and investing strategy plans for my clients, we have to attach a predictive interest rate onto each set of their investments.

The current economic climate is not a reason to put your head in the sand and simply hope for the best.  It is a reason to examine not only your assets but your objectives in retirement. Today is the perfect time, even amidst the turmoil and the uncertainties, to lay the groundwork for the tomorrow you’d like to enjoy.

Ben Fuchs, a certified financial planner with more than 15 years of investment experience, is founding principal of Fuchs Financial, with offices in West Hartford and Middletown.

Investment Advisory Services offered through Alphastar Capital Management, LLC, an SEC registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

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