Inflation: How it Impacts Your Financial Future
We don’t need a Harvard educated economist to tell us most things cost more now than they did a couple of years ago. We all know that inflation has reared its ugly head and we all feel it in one or another. However, prior to this, and for about the last dozen to 15 years, inflation had remained flat or stable. This period includes a near financial meltdown circa 2007-2009. For years thereafter, The Federal Reserve injected lots of liquidity to the markets, a process known as “quantitative easing”, with the goal of propping up the economy. The government also infused a significant amount of liquidity during the COVID crisis. These measures appear to have worked since the economy seems to have gotten stronger. This may be the time to worry about inflation.
Inflation assumptions in our clients’ financial plans drafted prior to the last couple of years were estimated conservatively above the actual or historic rates given their unpredictability in the long term. With inflation rearing its ugly head once more, many of these plans should be revisited for reasonableness. We suggest you do the same.
A topic related to inflation is employment/unemployment rates. With job openings reaching a record high, it simply reinforces the potential of the bull market being at or near their peak. It may be a good time for folks to look for pockets of safety in their portfolios, look for less correlation to equities and broader diversification, and generally recalibrate their risk, especially if in retirement.
At stake is the answer to a recurring question: How long will the money last? The pernicious and often unnoticed impact of inflation or excess risk is that it erodes your ability to purchase goods and services. This can be a very important factor to plan for, especially if you are in, or near retirement.