At this point, does it even matter how high inflation is? You are feeling it everywhere you go – the gas pump, the grocery store, vacation costs, and with many services that are part of your monthly routine, to name a few.
And let’s not forget about housing prices. Since when is $1,000,000 nothing for a home purchase price??? Yeah, even that one tripped me up.
Okay, I’ll give you the stats. As of mid-July 2022, inflation hit a record high of over 9%. This is a new 40-year historic high. So what is inflation doing to you? It is eating away at your purchasing power. Can you purchase anything for a $1 anymore? Is the Federal Reserve even printing $1 bills right now? Or is the minimum currency printed now at $100? Feels that way, doesn’t it?
How will inflation impact your retirement? I would like to say the answer is dependent on your age. But it is not. If wage increases are not keeping up with inflation, you have less money to spend on necessities and other items and therefore less money to save for retirement no matter your age. Yes, it is worse for retirees who did not prepare for inflation as they do not have as many options as pre-retirees to avoid the adverse effects from inflation in retirement.
Is the worst behind us? Probably not…. The Federal Reserve will probably be raising interest rates another 0.75% by the time you are reading this post. That would put us at a total increase on the interest rate of 2.25% this year. And there are five more months in 2022…. Ouch.
Keep in mind, no matter how bad you think the current situation is due to inflation and a possible recession, it is only temporary. But how do you define temporary? Guess I need a crystal ball to answer that question.
I have seen several experts predicting that the interest rates will go down sooner than you may expect. The reason why? A possible recession…… If the economy continues to slow down, the Federal Reserve will have to do something to help accelerate the economy which could entail a reduction of interest rates. As a financial planner who is trying to help my clients thrive in retirement, I don’t view financial plans as static but rather a moving target. These days, that target is moving quite frequently. Looking at things at one point in time is futile because everything is so fluid and ever changing. So even though the situation may not sound good right now, there is always the anticipation for more change to come, some bad (tax rate hikes) and some good (possible reduction in interest rates). All I can say, be prepared. And flexible!
As an example, I have heard many stories about new homeowners who have been dealing with supply chain dysfunction on their new construction homes which is delaying their scheduled close date. And now the interest rate is much higher than they expected, thereby driving up their monthly mortgage payment. And interest rates cannot be locked in more than 60 days from closing.
If there is any possibility that you can handle the higher mortgage payments now, and if interest rates reduce in the near future, then you can refinance at a much lower interest rate, get your mortgage payments down, and have more excess cash to figure out budgeting for vacations, emergency fund, and especially retirement. I know, sounds like an easy fix, but it is not for everyone.
That’s why financial planning is an instrumental component of your retirement plan. There will be many hiccups in your financial plan over the years and learning what steps you need to take to stay on track with your short-term and long-term goals is part of the financial planning process. And inflation risk is only one hiccup to your financial plan.
DISCLAIMERS:
All information provided by Hartmann CFO, LLC and Healthy in Retirement is intended for informational purposes only. The views expressed are personal opinions and should not be construed as financial or tax advice for your specific situation. Please make sure to do your own research or find a trusted financial professional, tax adviser or attorney before making any financial decision on your own.
Neither Hartmann CFO, LLC, Healthy in Retirement nor its owners make any representations as to the accuracy or suitability of the claims made here. Nor does Hartmann CFO, LLC, Healthy in Retirement, or its owners assume any liability regarding financial results based on the use of information provided here.