People are generally worried about stock downturns, especially the closer they get to retirement. As financial planners, we also must worry about inflation and its potentially devastating impacts. For over two decades, inflation has been moving slow enough to hardly notice its effects. It has been a silent killer. However, it isn’t silent anymore.
Anyone that has made a trip to the grocery store, bought gas, or a car has felt the pain of inflation. The inflation rate for April was a whopping 8.3%. However, inflation is felt differently by each person, depending on which items they buy. Inflation also has a disparate impact depending on socio-economic status. If you have a house and investments, you typically fare better as those assets tend to go up with inflation. If you rent and don’t have investments, you are likely getting hit harder.
To combat inflation, the Fed has raised rates twice. The first was 0.25%, the second 0.5%. They are expected to raise rates another 6 times in 2022. This will have a direct impact on the housing market, borrowing costs, and the economy. Savings rates should improve a little, but their increase is expected to still be well below the inflation rate.
Bonds are usually a haven when things go south with stocks. This year is different as bonds are under pressure because of inflation. According to Jason Zweig of The Wall Street Journal, bonds have had their worst start to the year since 1842 (as of May 6, 2022). That was a long time ago, making you wonder if the worst is behind you.
If inflation tames later this year as expected, then bonds will improve. If the economy cools off because of higher interest rates, then there may be even more potential for bonds. However, the outlook for the next decade appears more challenging than those of the 1990s, 2000s, and 2010s. I believe it is more imperative than ever to have an active manager on your side to help navigate these challenging times.
Regardless of where you fall, inflation is taking a bite out of your wallet. While you’re still working, your income typically increases with inflation. When you retire, you no longer have that luxury. Thankfully when we design retirement plans, we account for inflation. We want our clients to have enough income for their entire retirement, even if it needs to last into their 90s. We’re working hard to manage inflation pressures, so it’s not a silent killer for your retirement plan.
Listen to a deep dive about inflation on the Power Up Wealth podcast.
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