Big Retirement Questions: What if Inflation is High?

There are many retirement questions we hear over and over, so we know these are the major questions that weigh heavy on the minds of future retirees. Let’s discuss one big retirement question: What if inflation is high?

Inflation is defined as a general increase in prices for goods and services in an economy over time.

It would take roughly $26.98 today to buy something that cost a dollar in 1913. It’s hard to wrap your head around the idea of 2500%+ inflation, so here’s another way to look at it. When you were a kid, how much did a pack of gum cost? A dime? A quarter? How much does it cost now? If you can even find a single pack of gum, it’ll cost you a buck, a buck fifty. That’s the power of inflation.

Even though inflation has been historically low over the last few years, it’s still silently eroding the buying power of your investment returns each year. Retirees need to worry about inflation because it’s likely that inflation will go up in future years to revert to its historic norm of around 3 percent. It’s also important to note that some forms of inflation are higher than others. Healthcare costs and college expenses are two areas in which inflation is much higher than the average.

Fortunately, there are some strategies we can employ to help fight the effects of inflation over time.

Traditionally, investors have gradually reduced their exposure to growth-oriented investments. like stocks. as they got closer to retirement, relying on fixed income investments. like bonds. to provide income. However, low interest rates, longer lifespans, higher healthcare expenses, and other factors have led advisors to prefer a more balanced portfolio that includes enough growth potential to fight the effects of inflation.

One of the chief benefits of stocks is their returns tend to outpace inflation over the long term. To ensure your portfolio returns can fight inflation, it’s a good idea to have enough exposure to equities.

Now, keep in mind that inflation is just one factor that we consider when developing investment strategies for our clients. It’s impossible for us to make any concrete recommendations without knowing more about your personal circumstances, needs, and future goals. Every asset class has its own special risks to consider and it’s important to speak with a professional before making any important investment decisions.

One of the benefits of active management is that we are always monitoring the larger market environment and seeking investments that will perform well in inflationary or low inflation conditions.

We are always trying to strike a balance between risk and return. Today’s markets are volatile and many investors, burned by big portfolio losses in the downturn, want to play it safe. The problem is that a portfolio containing too little risk can leave you safe but sorry as you miss out on market rallies.

Too little risk can have serious adverse effects on your long-term investment returns since it limits your potential for upside. By trying to limit your market risk, you’re potentially leaving yourself open to the erosion of inflation, which can cause income shortfalls later in life.

Remember that $1 in 1955 could only buy you about 10 cents worth of stuff in 2021. This is because inflation has steadily caused prices to rise each year. You don’t want to get caught many years down the road with what seems to be lots of money but low purchasing power because items cost that much more.

If you are concerned about how to factor inflation into your financial planning, please contact our team any time.


Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on May 25, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.