By Antonio Porretta
Inflation quietly chips away at the buying power of our money each day, often without us even realizing it. Its impact might only become apparent later on, like when our bank balance dwindles slightly compared to the previous month, or when our grocery haul shrinks from four bags to three.
For retirees living on fixed or slowly increasing incomes, such as Social Security or pensions without cost-of-living adjustments, inflation can have even more serious long-term consequences in their financial plans. Read on to understand the impact inflation can have on your portfolio and how you can factor its costs into your wealth strategy.
Rising Costs Negatively Impact Income
Let’s start with income, whether you are still working or retired. Some of the largest money problems in the U.S. are rooted in our incomes failing to keep up with rising costs. Take college costs, for example. One of the chief causes for the massive amount of student loans today ($1.77 trillion as of Q3 2023 according to the Federal Reserve) was the disparity between stagnant wages over the past decade and college tuition inflation, which has averaged 8% annually, according to Bankrate.com.
This rate of increase not only dwarfs wage/salary COLAs, but most prudent college-saving investment vehicles as well. For parents trying to save and pay for their children’s college expenses, this type of inflation could ruin the best-laid financial plans.
Medical and healthcare inflation ranks right behind college tuition as one of the fastest-rising expenses, especially for retirees who tend to incur these costs more often than most other adults. According to Deloitte, a leading accounting and financial consulting company, from 2001 to 2021, healthcare costs increased a clip of 3.3% annually, nearly a third more than the average of all goods and services, and consumer incomes aren’t enough to keep pace.
Inflation also creeps into other sectors of our financial lives. From travel expenses, to purchasing a car, building supply and labor costs that add up into the price of a new home, each little tick up in inflation figures can compound into driving up the final cost of many of the goods and services we enjoy daily. It is for this very reason that the Federal Open Market Committee (Federal Reserve) has been so adamant about driving down the high inflation we experienced post-pandemic.
Wise Investments Can Curb Inflation’s Devastating Effects
On the asset side, inflation is a critical reason we need to invest our money wisely. As the post-pandemic years showed us, high inflation (and the accompanying high interest rates that arise as a result), can have a devastating effect on whether our investments (and purchasing power) are truly growing, keeping pace, or falling behind. For example, if inflation is cited as 6% but your bank CD or savings account is only yielding 3-4%, or your monthly pension benefit does not have a cost-of-living increase each year, the purchasing power of your money is falling behind.
Integrate Inflation Into Your Financial Plan
Unfortunately, inflation will always be a part of life. Which is why it’s important, when crafting your financial plan for the future, to bring it into every discussion as a crucial factor to consider—whether you’re doing it solo or with a financial advisor. Despite the availability of financial planning software programs, the inflation assumptions they use can vary greatly. Over a 25-year retirement period, it’s possible the total annual expenses could potentially double by the final years.
Whether you’re already in retirement, about to retire, or saving for future goals, factoring in the increasing costs of living (by adjusting inflation assumptions for your expenses) can increase the accuracy of your financial planning outcomes.
Are you looking for a financial partner to steer you toward long-term financial well-being? At Blackbridge Financial, we take the time to understand your unique circumstances and are here to guide you through the necessary steps. Contact us today by emailing me at antonio.porretta@lpl.com or calling 704.960.9646.
About Antonio
Antonio Porretta is an independent wealth manager at Blackbridge Financial with over 24 years of experience. He specializes in helping people create, distribute, and preserve their wealth. Antonio received an executive MBA from Saunders College of Business at Rochester Institute of Technology in 2007 and also holds the Accredited Asset Management Specialist℠, AAMS® designation. Originally from Rochester, NY, Antonio has been a resident of Harrisburg, NC, since 2007. Outside of work, he enjoys playing soccer and tennis, coaching, and spending time with his wife, Laura, and their children, Cristiano, Victoria, and Matteo. To learn more about Antonio and how he can make a difference in your financial life, visit www.blackbridgefinancial.com.
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Securities are offered through LPL Financial, Member FINRA/SIPC. Blackbridge Financial is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial. This material was prepared for Antonio Porretta’s use.