Inflation can destroy your retirement plans. The rate of inflation has been way below expectations for the last couple of years. For most of us, this isn’t a problem, but you should be wary.
While I don’t want to waste too much of your time going over what specifically causes inflation, I know we’re all familiar with the idea that our money loses its value over time. Typically, inflation each year is estimated at 3%, but for the last few years it’s been under 2%. Most of us would never complain about this, because we like not having to pay an increased price for our goods and services.
Economists have no idea why this has happened, butin December, a report came out saying we can expect an uptick in the inflation rate. If we find ourselves moving back to the normal 3% rate of inflation, you need to know what impact that will have on your savings plans. There are two groups of people I worry about when it comes to planning for inflation: those near retirement with “Lazy Money” and those who are creating retirement plans.
If you’re nearing or in retirement now, you need to be aware of how much money is what I like to call “Lazy Money.” This is money that people have sitting in cash, a saving account or CDs. Savings that I consider part of lazy money are those that are not growing with inflation. I can give you countless stories of people who ended up not having enough money for retirement because too much of their savings was lazy money instead of investments. When the inflation rate goes up, what happens to everything sitting in your savings account? You essentially end up losing money over time, because your savings are losing their value with no growth to make up for it. I understand why people are nervous about investing their savings. They’re nervous about losing everything they’ve worked for, but you need to find a way to balance out the lazy money in your portfolio.
If you are working on your retirement plan right now, have you factored in the effect of inflation long term? Most people forget about inflation when they make their own savings plans. They create these huge, intricate spreadsheets to plan for their future, but typically leave out the expected rate of inflation. This rate affects not only how much you should save year-to-year but also how much you’ll need to draw out of your savings once you retire. If you don’t adjust your plan for inflation, you run the risk of running out of money.
This is also a big problem I see with people who have built their retirement plan with financial planners. Many financial planners will create extensive plans for their clients, give it to them with a few suggestions and send them on their way without ever speaking to them again. What’s the issue with that? This initial plan is static and just a starting point.
Think of it like this: remember before everyone’s phones had GPS? You have to use Mapquest or a real map to figure out how to get to a new destination. It was fine for road-by-road instructions to get where you were going, but if there was a traffic jam or road work, you didn’t know how to adjust your route. Unlike these new GPS apps like Waze, which adjust your route as you go to help you avoid traffic and get to your destination as quickly as possible. Your life isn’t like Mapquest. It’s like Waze and your financial plan should reflect that.
If you made a plan with an advisor 5 to 10 years ago, even if they calculated for inflation, make sure you take a second look at everything and update it as things change. You need to come to terms with how unexpected things, like inflation, will impact you, whether your savings are in cash and not growing or your homemade plan hasn’t been updated recently. Planning for retirement is a moving target. It can change dramatically from year to year. You have no idea what your life will look like in six years or even six months. You want to create a plan that you constantly reevaluate and change as your life evolves.
That’s where I can help. I’m going to be a bit of nerd and brag about the software we have available for you. It is so cool!
The first thing you see when you open up your account is absolutely everything in your portfolio: your savings account, your investments, your 401k, everything. It also has the most advanced program to create a retirement plan for you. We can go in at anytime and evaluate your plan based on how your financial situation looks at that exact moment. We update your plan as life happens to make sure it works best for you. Life isn’t static and your retirement plan should not’ be either.
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