Why a financial plan is important given inflation and investing

William Waggoner II |

Rochester Hills MI Financial Planning - Stoney Creek Advisors 

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Although inflation has received a lot of attention lately, investors are not particularly surprised by it. From 1957 to 2021, inflation will historically average 3.57 percent. In June 1980, it reached a peak of 13.6 percent. Many of my clients have asked me about inflation. If it's good or bad, a lot of clients question. It's nice to see some inflation since it means the economy is strong and expanding. However, going overboard can strain financially, especially for retirees with fixed incomes. High inflation can deplete retirement savings, thus it can also have an impact on people who are getting close to retirement. What would I suggest to clients? Create a financial plan, or if you have one already, analyze it to see how you might adapt it to work for you in an inflationary economy.

Inflation: What is it?

The rise in prices of goods and services in an economy is referred to as inflation. Inflation of around 2% is usual in a healthy economy. In this sense, inflation is advantageous. In its most basic form, inflation simply implies that your costs for food, transportation, and other necessities of life will increase. You have probably noticed that your money is not as effective as it once was.

Supply and demand are the two main factors influencing inflation, but other factors like unemployment and anticipated pricing of commodities can also have a role. Demand-driven inflation occurs when consumers are willing to pay more for a good or service. In situations where there are supply limits and prices rise, it can also be supply-driven.

Why investors should care about inflation

Most people consider the immediate effects of inflation, such as higher prices. However, why does it concern investors? You must take the rising cost of living into consideration as you invest for retirement or other future goals. When you retire in 20 or 30 years, the cost of living can be significantly greater. Consider the price of a piece of bread or a tank of gas 20 years ago. Your investment and financial planning needs to take into consideration the fact that prices for goods and services fluctuate over time.

Since interest rates are very close to historic lows, inflation is more noticeable right now. Is the level of inflation we currently have bad? Where you are in your investing timeline—growing your wealth, preparing for retirement, or attempting to produce income in retirement—determines your answer.

Let's concentrate on pre-retirees and retirees who require income generation. Clients may be more concerned with maintaining their original investment at this stage than they were in their earlier years of accumulation with regard to growth. Numerous of these options for assisting clients in keeping their principle are interest rate-sensitive. At the moment, inflation and low interest rates are coexisting. A client may not experience much growth when interest rates and inflation are significantly lower, but they will still be able to maintain their principal and avoid losing too much of their purchasing power in the future.

Interest rates and price increases

The extraordinarily low interest rates, not just in the US but around the world, are one of the reasons increased inflation is hurting investors. The cost of the goods and services we need to purchase is rising faster than interest-bearing investments due to growing inflation and low interest rates. Clients with fixed incomes are experiencing the fastest decline in purchasing power since the early 2000s. In the past, clients might go to certificates of deposit (CDs), fixed annuities, or even bonds to help reduce investment risk, maintain principle, and keep up with inflation. However, a lot of these goods typically struggle in environments with high inflation.

Your budget can be of assistance

If they wish to continue their pre-retirement lifestyle, investors who are nearing retirement age or retirees who need to create income must now look to different investment options they haven't previously considered. Investors should be mindful of product diversity more than ever in the current economic climate, in addition to asset allocation. Thinking about your objectives, schedule, and expectations is necessary to put these two components together. You can consider investing in asset types that historically performed well during periods of high inflation to prevent losing too much purchasing power for requirements in the future.

For experienced and trusted Rochester Hills MI Financial Planning, call Stoney Creek Advisors at (248) 266-2900 today!