When it comes to the economy, we are living in uncertain times. Will interest rates go up or down? Is it a good time to buy or sell a house? And perhaps most relevant to older adults, what will inflation look like this year?
If you are old enough for Medicare, you likely remember several spells of inflation in your lifetime. In some ways, the 1970s have come back in the 2020s. This time around, however, inflation is particularly nasty because inflation affects how you plan for retirement, and inflation can affect your retirement savings.
At Montereau, we wish we had a crystal ball to foretell the future, but like everyone else, we are trying to make the best decisions we can with the information we have. While we cannot advise anyone on their personal financial situation, we will share a few thoughts around inflation and what you may want to consider if you are researching retirement communities.
What is inflation?
“Inflation” refers to the increase in prices in our economy. Everything from eggs and milk to cars and computers cost more this year than they did a few years ago. Economists and financial analysts have a general understanding of how and why inflation happens—but like many theories, inflation in reality is more complicated than what you read about in textbooks.
One way of thinking about inflation is to imagine 10 apples represent all the possible goods and services you could possibly buy. Then imagine $10 of currency is in circulation. In that case, all things being equal, each apple is worth $1.
Then imagine you added another $10 to the currency. With $20 in circulation, each apple is now worth $2. That is how inflation works from the Federal Reserve side of the equation. When you add currency (i.e., “money printing” or “stimulus”), each individual dollar is worth less.
Inflation gets complicated, however, because there is more than money at stake. Imagine you doubled the circulation to $20, but you also found a way to grow more apples. If you added another 10 apples to your existing pile of 10, then each apple continues to be worth $1. In the real world, this might occur if a new technology allows you to be more productive.
Another way inflation gets complicated is if you imagine that for some reason—perhaps social distancing and supply chain disruptions due to a pandemic—you are only able to produce five apples this year. Even if the $10 in circulation stays the same, your five apples are now worth $2 a piece.
How to Handle Inflation
Like many crises, one important way to deal with inflation is to keep a cool head. If you panic when the stock market tanks and sell all your stocks at the bottom, you miss out on the stock market going back up. If you hold on and wait it out, you most likely, eventually, will end up back where you started—or in an even better position.
Older adults who are planning retirement, however, might not have time to wait it out. You want to retire when you intended to, which is why financial advisers usually recommend balancing your portfolio differently as you get older, with more secure investments such as bonds or blue-chip stocks to balance out risky growth stocks.
A similar principle applies to inflation. While it may be wise to adjust your spending (maybe hold off on a new car purchase, or drive instead of fly to your next vacation, or shop around for cash-back credit card benefits), completely revising your retirement plans or trying to “wait it out” might not be the best strategy.
We recommend talking to your financial adviser, but we also suggest considering a few things:
Montereau Is Here to Help
We know it is stressful to think about how to account for inflation in retirement planning, but we are here for you every step of the way. From securing your Independent Living home before any potential price increases to discussing the right lifestyle for your retirement, we cannot wait to support you in your retirement journey. Contact us today to discuss your options and schedule an in-person consultation!
Tuesday, January 24, 2023
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