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How Bad Will Inflation Effect My Retirement?

How Bad Will Inflation Effect My Retirement?

| October 02, 2023

Let’s face it, inflation hurts. You may be buying a little less these days…or not, and just spending more. You may be performing a tango between the two. No matter, if you are breathing and spending your own money then chances are you’re starting to see the effects of inflation on your lifestyle.

I heard a comment on the radio a few days ago that seemed surreal. It was a current story that was actually a story we have used for decades to teach about the threat of inflation to your money and retirement: The lady stated that while she was getting her groceries, she was keeping a mental accounting to not exceed her budget. She continued by saying that this was the first time she found herself putting ordinary items on her list back on the shelf because she couldn’t afford them.

While everyone is not as prudent as this woman, credit card balances reached an all-time high this year with a balance of over 1 trillion dollars. Moreover, this number saw a 4.6% increase from just a quarter prior.1.

I think everyone is asking…how long will this go on?

We’ll save the answer to that for another day, but I can give you the bottom line: It depends.

Inflation is here to stay…at least for a longer time frame than anyone projected. The question now is, will this stubborn inflation affect my future?

Timing Matters. When we run a retirement plan, we assess the risk of something called “Sequence of Returns Risk” - the risk that your retirement portfolio under performs in the years leading up to your retirement or directly following retirement. To illustrate this, below is hypothetical chart of two investors taking $5,000 from $100,000 per year. They each average an annual return of 4%; however, the green investor retires at the beginning of a down market and the blue investor retires at the beginning of an up market. You can see the vast effect on the portfolio.


Unfortunately, retirees today are facing a double whammy of risk with the unknown “sequence of returns risk” that any retiree faces combined with another drag on their portfolio - inflation. Higher inflation in early years of retirement creates the same phenomenon as a down market on a portfolio.

So, the answer to our question of will this stubborn inflation effect my future is that most likely it will.

The most important thing you can do right now is have a plan to fight it. We are no longer living in a world where you can recover from keeping up with the Joneses too long. Americans need to face the facts. Money is tight and getting tighter. Not doing anything could be setting the plan for your future in stone…and not in a good way.

It is more important today than ever in recent history to have a financial plan and pay heed to that plan. Professor Philip Zimbardo said, People in life do not regret what they did, but what they did NOT. I cannot tell you the number of times we have heard “I wish we would have done this years ago.” They were referring to their financial plan. The thing is that economic history gave them more grace than it will be giving you if things don’t change. So, take steps soon, so that don’t have the regret of what you did not do.