What does inflation mean to YOUR bottom line?
Jason Macaluso
Vice President Wealth Management-Boone Macaluso Group of Raymond James
“When demand exceeds supply, prices rise causing inflation.”
I remember learning about inflation in my Economics 101 class my freshman year at Providence College with simple examples: the rising cost over time of the price of a stamp or a loaf of bread, or more importantly to a college student, a case of beer!
#Inflation , in general terms, has been very tame over the last 25 years. Goods & services have been going up over time, but the rise was manageable and wasn't front page news like it is today. Prior to 2022, we knew that we would be paying more than our parents did for items, who also paid more than their parents did for similar expenses. (Remember grandpa saying "I bought my first house for $10,000 and it only cost $1 to fill my car with gas")?
Relatively speaking, a household's bottom line was similar to what it is today, as wages have also increased to keep up with the cost of living. For the last 25 years, as the prices of goods and services rose, so did most wages, including those for retirees. Just last year, the Social Security administration made an increase to the cost-of-living adjustment of 5.9%. This was the biggest COLA increase to #socialsecurity checks in about 40 years, but prior to 2021, it wasn't really essential as inflation was well below historical averages.
How do we plan for a large inflation spike (similar to what we are going through today) when the average increase has only been about 2.5% a year for the last 25 years?
When building a #financialplan for clients, we always factor in the increase of prices on future living expenses & goals. Although it's more art than science, we make certain assumptions on what your spending habits will look like at certain periods in your life. Examples include:
What we generally see is that at the beginning of your #retirement , there is an increase in spending...ie, doing everything you wanted to do, but couldn't while you were working. Then spending levels off to reasonable expenses, before it eventually falls when you're doing less as you get much older.
There are certain expenses you have to plan for regardless of age: food, housing, utilities, clothing, and insurance are the most common. When we build the plan, we factor in a standard 2.5% inflationary increase for these. Over time within retirement, you will probably spend a little less on some (clothing) and more on others (eating out), but in the end, these expenses are fairly constant & predictable.
All goods and services don’t rise in price at the same rate as one another and income (or investment performance) doesn't always follow.
Many of my clients' personal spending patterns bear little resemblance to broad measures of economic inflation, so planning is key. My 40 year old client not only has to deal with higher gas prices today, but now #collegeplanning just got a lot more expensive. However, my 75 year old client isn't sitting back and enjoying their Social Security increase because they're still buying high-priced gas, and also have to worry about the rising costs of healthcare, specifically #medicare .
Although my 40 year old client may have been awarded with a nice raise in salary, their 529 College Savings plan is about 10% lower this year. Same with my 75 year old client; the Social Security increase was nice, but what about the double digit loss in their balanced retirement account?
领英推荐
Medical costs and college tuition have risen faster than other expenses, while categories such as apparel have actually declined in cost due to globalization. Until recently, home heating oil and gas were pretty level, as were most food & grocery items.
Now is the time to let history be your inflationary guide.
When we build the Financial Plan, we separate expenses into multiple categories for numerous reasons. One reason is that we earmark investments for specific purposes (i.e., 529 College Savings Plans & HSA accounts). The second reason is to take into consideration exactly what we are dealing with today: we attempt to forecast extreme inflationary pressures on specific future spending. When we look at historical averages, here is what we use for inflationary increases on major expenses:
2022 has been a year for the record books; with losses in balanced #portfolios and all-time high inflationary price increases, planning for these situations are important. Although we can never predict the "black swan" events, it is imperative when building the plan that we factor in more worse-case scenarios than positive situations. When we can add various stresses to the plan, we can see if there are situations we should consider before they happen. We may never know exactly when they will occur, so it's usually a case of planning for the "when" vs the "if" because by the time they hit, it's too late.
Inflation may have peaked, but that doesn't mean prices will be lower in the future. By factoring in the rising cost of major expenses, you can have confidence that when it comes time to retire, your fixed income keeps up with YOUR specific household cost of living.
-Jason
Disclaimer: UBS Financial Services Inc. and its affiliates do not provide legal or tax advice. Clients should consult with their legal and tax advisors regarding their personal circumstances and before they invest or implement. This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned, including estate planning strategies. In addition, the information is current as of the date indicated and is subject to change without notice.
Important information about Advisory and Brokerage Services: As a firm providing wealth management services to clients, UBS Financial Services Inc. offers both investment advisory services and brokerage services. Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that clients understand the ways in which we conduct business and that they carefully read the agreements and disclosures that we provide to them about the products or services we offer. For more information visit our website at ubs.com/workingwithus.
…