Navigate through retirement with confidence as April Schoen addresses the silent thief, inflation, revealing strategies to protect your financial future.
In this episode, we’ll dive deep into understanding inflation and its impact on your retirement dreams.
Unpack the essentials of inflation and its direct impact on your retirement savings.
Discover historical perspectives on inflation to better understand its cyclical nature.
Explore strategic ways to combat inflation, from guaranteed income streams to growth assets.
Gain insights into personalized inflation rates and how to calculate yours for precise retirement planning.
Ready to secure your retirement against the eroding effects of inflation? Join April Schoen for invaluable insights and strategies on the Secure Retirement podcast. Available now on Spotify and Apple Podcasts.
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Transcript
April Schoen: Welcome back to The Secure Retirement podcast, where we help guide you through the complexities of planning for your retirement. And today, this is gonna be another Ask April episode where I take some of those common questions we get from clients and really dive deep. My name is April Schoen. And today we're going to be talking about inflation. So inflation is like that current that can suddenly erode your purchasing power of your savings and your income over time. And in this episode, we're going to talk about what inflation means for your retirement plans and how do you steer a steady course in the face of its challenges?
Well, let's start with the basics. So what is inflation? So imagine you're at your favorite coffee shop, and a year ago, you could get your latte for $4. But today, you go in and they say that'll be $4.50, please. Well, that extra $.50 is inflation and action. And inflation is the rate at which the general level of prices for goods and services is rising. And as those prices rise, it can erode our purchasing power. And this number that you hear quoted in the media, what they're talking about is they're comparing prices today, to a year ago. This is why your dollar may buy less today than it did last year.
For example, as of January 2024, the inflation rate is 3.1%. That means the cost for goods and services across the economy is 3.1% higher than it was this time last year, January of 2023. And as we kind of look forward looking, there's a lot of economists that believe that inflation may kind of stick around this like two and a half to 3% number by the end of the year. Now, you may be wondering, why do I care about this? Well, I think it's for that exact reason about prices continuing to rise. I can remember when you could go to the grocery store and fill up your cart for about $50 a week. And today you're lucky to get out of the produce section for that.
So for us dreaming of retirement, understanding inflation is like knowing the weather before going on a sailing trip. It helps us prepare. So we don't capsize our budget, the moment that we set sail into retirement. Especially think about living into retirement 20 or 30 years, or more for that matter. So how do we combat inflation? So here's kind of the kicker is when we're working, this is very different from when we're in our working years and then when we are in retirement. Because when we're working, when we're in our working years, we have a secret weapon against inflation. And that's our salary. It usually goes up over time, right? You may get pay increases, you may get promotions, you may change jobs, and that increasing salary is what helps offset inflation.
But what happens when you get into retirement because you don't get those salary increases anymore. Now, Social Security does have built in a cost of living adjustment. But there have been several years in our recent history when there wasn't an increase. And did you know that usually when your Social Security benefits go up, that your Medicare premiums go up as well. So really, you can view that Social Security increase as a way to keep up with rising Medicare premium costs.
Now, what if you have a pension? So one key question to ask is, do you have a cost of living adjustment on your pension? And what is it? If you're retiring from the state of Florida, it's likely somewhere between two and 3%. Hey, listen, I know that doesn't sound like a lot sometimes. But trust me over a 20 or 30 year retirement that two to 3% increase is really going to add up. Because there's a lot of corporate pensions that do not have a cost of living adjustment. Talk about living on a fixed income. So what do you do to combat that?
Well, we're gonna get into some key strategies in this episode. But before we get into the strategies on how to combat inflation, I really want us to actually go back and look at history and talk about how inflation has impacted our economy over time, so that we can see how it's ebbed and flowed. And this is really important for us to understand because sometimes it can feel like this is the only time we've ever experienced what's going on today. For example, in 2022, when we had really, really high inflation, the highest we've had in decades, it can feel like we've never experienced this before, when that's not really accurate.
We've seen this happen time and time again. So it's good for us to go back and get a refresher. And listen, I think a lot of you are going to remember this and how our inflation was at these different times, and how that impacted our overall economy. So I want to start back in the 1970s. This was a decade that is known as stagflation. Okay, that was stagnant economic growth. So the economy wasn't really growing, but we had really high inflation. Does that sound familiar? Now, at this time, we had oil crises that were leading to skyrocketing fuel prices, which then pushed up the cost across the board.
We see that happening today, too, right? When we have some supply chain issues, that will also cause us to see a rising cost of goods and services, whether that is fuel costs or other supply chain disruptions. And listen, that was a really tough time for savers because the value of money didn't just slide, it plummeted. We had really, really high inflation. Now, if you go fast forward to the 80s, we see where the Federal Reserve took some bold steps of hiking interest rates to try and tame this inflation. Again, does that sound familiar? Well, it worked in the 80s, but not without causing its own set of challenges, which included a very sharp recession.
So these historical episodes teach us the ebb and flow of economic forces and the importance of being prepared. Because guess what we've been through it before, and will likely, we are going to see those same time frames again in the future, so we have to be prepared for it. Now, if we go into the 1990s, obviously, this was like the .com era, we had relative stability when it comes to inflation. We had tremendous economic growth, which was a very stark contrast to these volatile decades that we had before the 1990s. And we had these prudent monetary policies, we had this tech boom, right?
And so inflation was really kept at bay. And it really allowed for prosperity that defined that era. But then, as sometimes we say what goes up must come down, we enter into the early 2000s. And we really encountered a series of economic challenges that tested our resilience. We had several things happen back to back to back. We had the .com bubble burst at the dawn of the decade. And then we had the significant impact of the September 11 attacks in 2001. This really led to a lot of economic uncertainty. You remember, we had three years back to back when the market was down double digits.
Now at the time, we were having all this economic uncertainty, inflation was relatively controlled. And then we get to 2008 when we had the great recession. And this Great Recession in 2008, was a global financial crisis that started with the collapse of the housing market. And in 2008 and 2009, we faced some of the most challenging economic conditions since the Great Depression. And sometimes we forget that. It wasn't that long ago that we went through this. And in the years that followed this crisis, we saw historically low interest rates and inflation.
And this era of low inflation, in many ways, was by design, because central banks, including the Federal Reserve here in the United States, implemented policies that they were trying to stimulate economic growth, because our economy had basically come to a halt. And these policies included keeping interest rates low because when interest rates are low, it encourages people, it encourages companies to borrow and spend money. And then the opposite is also true. As interest rates are higher, it means that you're not encouraged, you're actually dis encouraged. It means you don't want to borrow money and you don't want to spend money. And so that's what helps constrict our economic growth, which can bring down prices.
So for years, this strategy seemed to work. The economy gradually recovered, inflation remained low, and it was really an unprecedented period of economic stability and growth that we really got used to. I mean we had one of the longest bull runs in our history. But then the unexpected happened in 2020. The COVID 19 pandemic hit, and it turned the world and its economy's upside down. Suddenly there were supply chain disruptions everywhere, there was a surge in demand for certain goods and services as people were adapting to these lockdown procedures. And there was significant monetary stimulus to support economies that really lead to a very swift rise in inflation.
So by 2022, we were witnessing inflation rates that we hadn't seen in decades. And the Federal Reserve along with other central banks around the world, they faced a daunting task, just like we saw in the 70s. They began to raise interest rates, trying to calm down this inflation. However, their goal that was achieved what's often called a soft landing, meaning they were looking at slowing inflation without pushing the economy into a recession. Talk about walking a tightrope, right? This is this balancing between being aggressive enough in raising interest rates to combat inflation, while being cautious not to halt the economy growth entirely.
And as the Fed began adjusting interest rates upward, many eyed the economic indicators nervously. And if you remember going back to 2022, we had some of the highest inflation we've seen in decades, we had the highest interest rates that we've seen in a long time, and then the stock market and the bond market tumbled. And as the Fed began adjusting these rates, like I said, we were really keeping an eye on everything, wondering how far this cool off would go, and how much damage, if any, would it do to the economy.
And as we moved into 2023, we began to see the effects of these policy changes. Inflation started to come down from its peak, although there were still lots of concerns about potential economic slowdowns. And again, with the current inflation rate that just came out today as I'm recording this for January 2024, is at 3.1%, with projections of it, likely going down some but probably going to be somewhere in the two and a half to 3% range by the end of the year. We have to understand that this situation remains fluid. There's also a possibility that we see interest rates rise again in the future. Excuse me, we see inflation rise again in the future, depending on what happens with interest rates.
And so it's important that we understand history and see that we've gone through this before, and we're going to go through it again. But we have to understand that we need to remain fluid, right? That we need to be able to adapt our financial planning, especially as we approach retirement. So this inflation rate that you hear in the news, like I said, 3.1 for January this year. But here's a little secret, that number that's more of like a one size fits all. Your personal inflation rate is going to the beat of its own drum, especially if your retirement dreams include things like travel, fine dining, maybe a boat, right, some expensive toys.
And so I'm going to talk about what is your personal rate of inflation? And so you may be asking April, how can I figure that out? How can I figure out what is my personal inflation rate? You want to start by tracking your spending. So look at where your money goes each month and how those costs have increased over time. And this is going to give you a clearer picture of your personal inflation rate. And that's going to help you better plan for retirement. Especially when we start thinking about health care costs. But it's not just about fighting inflation. It's understanding it, it's planning for it. It's using this information to make good decisions about our savings.
So let's not let inflation just be this thief in the night. Let's turn the lights on. Let's face it head on, and let's secure our financial future. So how do we do that? How do we whip up a defense against this silent thief as we like to call inflation? Well, it starts with a plan. A plan that not only satisfies our lifestyle for today, but makes sure that we've got more money tomorrow, because that's the whole thing with inflation. We know that milk is going to cost more tomorrow than it does today, so we have to make sure that you're going to have more income in the future than you have today.
And what about healthcare, healthcare is not getting any cheaper. And in fact, health care is climbing at a much faster clip than that inflation rate that we hear in the media, because that is a huge basket of all different types of goods and services. So healthcare is not getting any cheaper. And let's face it, we're not getting any younger. So as we look ahead, remember, inflation is just one part of the retirement planning puzzle. So let's get into some strategies that we talk about with clients for how to combat inflation.
And you know, this process that we go through with our clients, we want to really make sure they've got enough income in retirement to support their lifestyle today, so that you can keep living the same great life that you have when you step off into this wonderful thing called retirement, and making sure that you're going to have more money down the line when you need it. So the first step in our process involves mapping out what are your guaranteed streams of income in retirement. These guaranteed streams of income, I want you to think of these as your financial lifeboat, they are essential to keeping you afloat.
So what are some choices, options? What could some of these guaranteed streams of income be? Well, this could come from Social Security, this could come from a pension, and this could come from annuities. And the goal here is to have enough guaranteed income to cover your basic living expenses. It's like ensuring that you have enough supplies for the voyage. Covering everything you need from provisions to emergency gear. So once we have that figured out, right, we've got enough guaranteed income to cover our basic living expenses, then we can move on to being more strategic.
We want to talk about two very distinct buckets on your balance sheet, so that you're well rounded. So you're balanced. And this first bucket is for discretionary income. Okay, so sometimes you can think of this as like your adventure fund. Imagine you want to take that dream Alaskan cruise, or maybe you're tackling some home renovations. So you want to have a bucket that you can go to for discretionary income that's outside of our basic living expenses. And then what about the future? Right, so that brings us to our second bucket, we want to grow assets. We want a bucket on your balance sheet that's continuing to grow for the future to help offset that inflation. To be that natural inflation hedge for you.
This is like a treasure chest that you're not drawing from now, but you're letting grow for tomorrow. And this bucket is crucial for helping you outpace inflation in the long term. But I will, I'm gonna give you some tips here. And a word of caution for some careful consideration. You really want to pay attention to what type of account, what type of investment you're using for this growth bucket, because not all types of accounts are really going to help you satisfy that goal, that need. So if we think about traditional pre tax retirement accounts, like an IRA, a 401k, the deferred comp, a 403b they all come with a caveat. And that's required minimum distributions.
And the current age for RMDs, or required minimum distributions is 73. And in nine years or so it's gonna go to 75. But these RMDs mean that you have to start pulling money out of those accounts, at currently 73 whether you want to or not. So when you've got pre tax retirement accounts, when you know you have to start tapping into them at some point in the future, so that may not align with your growth strategy. So instead, you want to look towards vessels like Roth IRAs, non retirement brokerage accounts, cash value life insurance for those growth assets.
Because these options offer you flexibility, they offer you the potential for growth without having to take money out of them, keeping that treasure chest intact for when you really need it. And implementing some of these ideas in your retirement planning is like charting a course with precision navigation. So by securing those guaranteed incomes for necessities, and then you've got setting aside funds for life's adventures or unexpected turns, and then strategically growing your assets for the future is really going to give you that confidence to know hey, I've got enough income today to live the life I want to live.
I've got buckets, I can go to if I need it or want it and I've got money that's continuing to grow for the future. That allows you to be not only prepared, but have resources so that you can adapt, right, because with the right strategies in place, you can really make sure that your retirement journey isn't just surviving. Because I don't want you to just survive, I want you to thrive. I want you to have a beautiful, wonderful retirement where you get to go and do all the things that you've been dreaming of, no matter the economic currents.
So to bring this discussion to life, I want to share a couple of stories from some clients of ours that have really done a great job with some planning and helping navigate not just retirement, but also this inflation piece. So I want to talk about Sarah and Tom, and then also Marcus, with each of their unique strategies, that they all had this common goal of having a smooth sail into retirement. So let's talk about Sara and Tom, a couple that they were really looking forward to retire but they couldn't wait to, they've got some big plans, they already have some travel booked for their retirement, some places that they've always wanted to go.
And they're also excited about being able to spend more time with their grandchildren. Their grandchildren don't live here in town. So they're going to be traveling to different places like Orlando and Chicago, to see their grandchildren. And they're really excited about just having some of that flexibility for their time. And then they're also really excited about being able to volunteer more, because I know Sarah mentioned, there's a lot of organizations that mean a lot to them. And they just feel like they haven't had the time to really be able to volunteer like they'd like to.
So in their planning, they had several types of accounts, and different sources of income. So for income, they both have a pension from the state of Florida and their Social Security benefits. So this is their guaranteed streams of income. And then for retirement accounts, one has deferred comp, a 457 plan, and then one has a 403b. And these accounts really are allowing them to provide them discretionary income. And then they also wisely invested in Roth IRAs and cash value life insurance, because they understood the importance of having this growth bucket that would be untouched by immediate needs, and will be able to grow over time.
So that Roth IRA provided them with tax free growth, and tax free withdrawals. While the cash value life insurance offered a flexible, tax efficient way to either pass on wealth, or tap in to it if they need. So in choosing these vehicles wisely, it meant that they're well prepared to face inflation. They get to live the life they want to today without worrying about the eroding effects of rising cost. And then there's Marcus. Marcus is not married, he's single. And what he really wants to do is he wants to maintain his lifestyle in retirement. But he also wants to maintain his independence in retirement.
So that's very important to him to have his independence. And so making sure that his money is still growing, to help him with that piece. So Marcus has a traditional retirement account from a 401k that he had with his employer. He's got a Roth IRA. And then much like Sarah and Tom, he diversified into a non retirement brokerage account. So this mix gave him both some tax free income, the potential for capital gains and income from his brokerage account investments. But Marcus was also very strategic about his required minimum distributions from his retirement account.
Because Marcus realized he didn't necessarily need all of his required minimum distributions for his day to day expenses. So what he's been doing, he's been reinvesting the after tax proceeds into his growth bucket. So now what he's doing is he's turning this mandatory distribution into an opportunity for further growth. So Marcus' story is a prime example of turning a potential obstacle into an advantage. The RMDs required minimum distributions, they're often seen as a drawback to traditional retirement accounts due to their taxable nature and the forced withdrawals.
This really became a tool in Marcus' arsenal for fighting inflation, because by reinvesting these funds, not only did he keep his growth bucket growing, swelling even, but he's strategically managing his tax situation, ensuring that more of his money is working for him. And so these client stories really underscored the power of proactive planning and strategic thinking in retirement. So whether it's choosing the right mix of accounts or turning RMDs into a growth strategy, the key is really understanding your financial landscape because it's different for everyone, and making it work for you.
So these stories show how with the right planning tools and mindset, navigating the complexities of retirement inflation, can really lead to a fulfilling and financially secure retirement. And that's what I want for all my clients, a financially secure retirement, but also to be fulfilling. For you to feel happy and good, and be able to live out those dreams that you have. So as you're thinking about these stories I was just telling you of Sarah and Tom and Marcus, consider how you can apply some similar tactics into your own retirement planning.
Remember, inflation is inevitable. We cannot hide from it. It's an inevitable part of our economic landscape. But it doesn't mean it has to dictate or control the terms of your retirement. With the right preparation, identifying those guaranteed sources of income, creating diverse income buckets, and strategically managing your assets, you can not only withstand the pressures of inflation, but you can thrive in spite of them. Sarah and Tom showed us the value of tax efficient growth through Roth IRAs and cash value life insurance. Marcus demonstrated how leveraging RMDs for continued investment turned a requirement into an opportunity, right.
So as you chart your course forward, remember that the seas of the economy are always changing. So we need to stay informed, we need to stay diligent, and we need to stay adaptable. So if right now you're feeling unsure about how to navigate these waters, remember, you don't have to do this alone. Financial advisors, financial planners, much like seasoned captains, we can help guide you through these complexities ensuring that your journey is not just successful, but enjoyable. So if you're unsure about your current plan, I'd encourage you to reach out.
Booking a call with us is really the first step toward a retirement plan that's tailored just for you. That's ensuring that every aspect of your financial future is aligned with your dreams and goals. We do not believe in a one size fits all here. We work with each client individually on their plan. So let me tell you how you can book a call. It's very simple, you can go to our website, which is curryschoenfinancial.com. And we'll link it in the show notes. And then at the top, you're going to click on the button that says schedule a call. And you're going to see an option to book a 30 minute phone call.
So just click on that, it's going to show you our calendar. And you can pick a day and time that works for you. So again, that is curryschoenfinancial.com And then you're gonna click on the link that says schedule a call. It's that easy. So I just want to say as we're wrapping up today, thank you for joining us today on The Secure Retirement podcast. Again, I'm April Schoen. I'm loving doing these episodes, and we're happy to help you kind of navigate this world of not just retirement but I love getting specific topics like inflation, and talking about them in more detail.
So if today's episode has sparked some questions, some ideas you have some stories of your own to share, reach out, I'd love to hear from you. And until we meet again, keep your eyes on the horizon, your hands steady on the wheel, and I hope you enjoy the journey. Here's to charting a course to a future filled with prosperity, peace and possibility. See you next time.
Voiceover: This material is intended for general public use. By providing this content. Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation or otherwise act in a fiduciary capacity. If you'd like additional information about our services, you can visit our website at curryschoenfinancial.com or you can call our office at 850-562-3000. Again, that number is 850-562-3000. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities, Guardian or North Florida Financial and opinions stated are their own. April and John are registered representatives and financial advisors of Park Avenue Securities LLC. Address 3664 Coolidge Court, Tallahassee, Florida. Zip Code 32311. Phone number 850-562-9075. Securities, products, and advisory services offered through Park Avenue Securities, Member of FINRA and SIPC. April as a financial representative of the Guardian Life Insurance Company of America, New York, New York. Park Avenue Securities is a wholly owned subsidiary of Guardian. North Florida Financial is not an affiliate or subsidiary of Park Avenue Securities or Guardian.
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