Personal Finances - 2021

Inflation: Should I Be Worried?

By Mo Vidwans

It creeps in slowly and we would not even notice it if we are not careful. But at the same time, it is or can be devastating and can ruin all our plans if we don't recognize this powerful, insidious force. Let me give some examples. Let us assume a gallon of milk costs us $2.50 today and there is about 3 percent inflation that we are dealing with every year. Which means the price of this same gallon of milk will be $2.58 next year. Some people will think, well, that's ok because it is not much of a change. The same gallon of milk at the same rate of inflation, 10 years from now, will be $3.36. Now that is noticeable. It will double today's price at this rate of inflation in just over 23 years. Imagine this happening to everything you buy; our cost of living will be twice in about 23 years. If our household expenses are about $5,000 every month, then they will be $10,000 in 23 years. That is just about the time your newborn will be graduating from college. And as you know well, there are many things in our daily use that can inflate much higher like tuition fees, car prices, furniture, and kitchen appliances. It is a good thing that we don't buy them frequently.

We, as investors, like inflation about as much as we liked villains like J.R Ewing on the Dallas TV show, if you remember that one. The animosity is understandable because, for sure, rising prices eat into investment returns and most certainly erode the value of our retirement savings. If I can continue with the example given above: at the rate of 3 percent inflation our expenses in retirement will double in 23 years but the income stream will stay about the same. This means we will have to make up for shortfall to support the expenses somehow, which is a formidable task for most.

There was a time back in 1980s when the inflation had become rampant and had crested at 14 percent. It is hard to imagine that now, especially for younger investors, since over the past 15 years or so the inflation has averaged about 1.9 percent, well below the 3.4 percent average annual increase since 1950. Federal Reserve Board has been working on and watching carefully to keep the inflation rate at or around 2 percent. It is expected that in the wake of the pandemic, which brought with it record unemployment, recession and massive destruction of consumer demand, near term inflation will not exceed our expected limit for a while. But, at the same time the massive Govt. spending has the potential to derail that, at least for a short while as we are experiencing now for last few months. I do believe that the Federal Reserve has enough tools and expertise to manage both scenes.

One thing is certain, however, that even if the inflation isn't a worry right now, we should still think about it seriously (for the long term) and factor it into our investment strategy and even more so for our retirement planning strategy. Generally, the younger folks don't think much about inflation in retirement planning because it is too far away (almost 25 - 35 years) and it is hard to fathom that kind of time span. And then it is very likely that these folks will live another 20/30 years beyond the starting point of their retirement which itself was unheard of in the time of their grandparents and perhaps even parents. It was very common to see, in the 1950s and 60s, people retiring at around 65, get the social security started and be gone within five years. This is certainly not the case today.

We need to invest today with our retirement in focus. Two things are clear: the planning is going to be for a period of 25 to 30 years after retirement because we do indeed could live that long and secondly manage our expenses now for that long period considering the inflation. At the time of retirement, say if it is 25 years away, all costs are going to double at the rate of 3 percent inflation and then they will double again in 25 years after that. Not only it is an intimidating thought, but quite realistic, and planning for something that far out is even more daunting and formidable. Take heart, it can be done; you just have to get some help for such planning.

To start, protect your portfolio with Treasury Inflation Protected Scurities (TIPS). The principal value of these notes rises in step with CPI, and because the market is pricing in very low inflation expectations, TIPS are cheap. Should inflation start to trend higher than current inflation, TIPS would go higher too. You can buy TIPS directly from Uncle Sam or use a Fund.

Stocks have historically outperformed inflation over the long periods. If you do indeed have a long-term focus, which I recommend everyone should have especially for stocks, you should be choosing funds or ETFs that invest in companies with long term focus in mind and that includes international stocks. Rising inflation in the US typically results in weaker dollar - a boom for investors in international firms whose foreign currency profits get converted into more greenbacks.

Should we be worried about inflation? Yes, absolutely. Is it manageable? Yes. Especially if you recognize that as a concern and plan for it from the beginning while managing the growth and income in your portfolios; especially if you manage your expenses and even more importantly your and your family's health over the long period. We don't much think about it, but healthcare is a major expense and needs to be well managed because it is a major contributor to the expenses, especially in our golden years.

Mo Vidwans is an independent, board certified financial planner. For details visit, call 984-888-0355 or write to