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Understanding Your Inflation Experience

Understanding Your Inflation Experience

| May 17, 2022
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The news is bursting with discussion of inflation. It's a subject we haven't had to discuss in great detail for more than 30 years. If you are young then chances are this is your first experienced with inflation, and you're wondering how this is going to affect you. If you are middle aged you might remember inflation in the 70's and 80's, but are probably recognizing how today's inflationary factors are affecting you differently at this phase of your life. If you are already retired then you have probably been through this before and wondering how to protect your purchasing power on a limited income.  

Inflation is the rate the value your money decreases. In financial planning terminology, inflation is considered an 'eroding factor', and, like taxes, represents a threat to financial goals. Despite how the media portrays it, inflation is not a simple subject that fits neatly into soundbites. It affects the cost of goods and services differently, and the magnitude of its impact depends upon where you live, how you live, and how you spend money.  In short, inflation affects the young, middle aged, and retired differently, and to better understand how current inflationary factors affect you consider the following questions: 

  1. Did you buy a new car last year? 
  2. How often do you eat out? 
  3. How many miles do you drive each week? 
  4. Are you a vegetarian?  
  5. Do you heat your home with oil? 
  6. Do you pay for school or daycare?  

Generally, the young are most capable of absorbing or even benefiting from inflationary periods because they are the most flexible and able to take greater financial risks. As renters, the young are heavily impacted by rapidly rising rental rates, but renting also means they are able to relocate to chase job opportunities. This flexibility helps the young benefit from increasing wages. While the young often have student debt to contend with, payback of those loans has been on hold for a while, and fixed loan rates means they will eventually pay that debt with deflated dollars. It's a very  different story for the middle aged in their 30's to 50's.  The middle aged have kids, a mortgage, and greater transportation needs because of commuting.  The middle aged are paying for childcare, consume a lot more groceries, and are saving for college and retirement at the same time.  With all these responsibilities the middle aged can't take the risks that the young can. They aren't as flexible and can't take full advantage of the range of opportunities provided by an evolving job market. On the other hand, the middle aged often have a fixed mortgage that protects them from rising rental expenses.  They have fixed rate mortgages that will be paid back with deflated dollars.  Retirees, on the other hand, are playing a completely different game.  They are out of the job market and unable to take advantage of rising wages or lucrative new employment opportunities created by an evolving job market.  Because retirees are generally living on fixed income they are the least flexible and lowest risk takers. On the bright side, retirement income sources like pensions and Social Security often have cost of living adjustments that reduce the risk of running out of money.  Retirees don't have college costs, have lower food costs, own their home, drive less, and have less debt concerns.  

How do you manage your personal inflation rate?  It's not simple. Many fundamental aspects of our spending are not flexible.  Still, you can recognize those discretionary outflows affected by inflation and plan accordingly.  Should  you cut back on dining out?  Should you wait to buy that car?  Should you remodel before the costs increase significantly?  Should you postpone travel till fuel prices stabilize?  Should you plan to work longer or retire with less?  

Although inflation's affects are varied, we can analyze how it might affect your personal financial goals.  Our planning software is capable of comparing different inflation rates and combinations of events that also include bear markets, higher taxes, etc.  We'll be focusing on eroding factors like inflation at client review meetings, but reach out if you'd like to discuss inflation's affects on your financial plan.  

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