Inflation; The Thief in the Night

What is inflation? There are plenty of fancy definitions, but it will suffice to say that inflation is the decline of your purchasing power over time. Simply put, one hundred dollars no longer buys what it used to. During the period from 1960 to 2022, the average inflation rate was reported to be 3.8% per year. This is an overall price increase of 903.96%. What exactly does that mean for the consumer? Well, an item that cost $100 in 1960 would cost $1,003.96 beginning in 2023. 

I think we can all agree inflation is a real thing but what drives it? Economics 101 teaches us about supply and demand. If you believe the price of an item will be higher in the future, you might buy extra (demand) causing a reduction in inventory (supply). When demand surges and inventory shrinks, the price goes up. When the price of an item is high and consumers are not buying it, inventory goes up often resulting in a price drop to move the inventory. Add to this the monetary policy of the Federal Reserve. If interest rates are low, consumers spend more money; higher demand equals higher prices. When interest rates rise, consumers generally spend less money; less demand, and lower prices. In an effort to smooth out this economic roller coaster, the Federal Reserve has an inflation target of 2%. Their objective is to not only keep prices from skyrocketing but to also keep Americans employed. Think about it. If inventory is high and the product is not in demand, there is no need to make more which means companies will reduce their workforce.

Now that we understand a little more about supply and demand as well as why interest rates go up and down, do you think it might be a good idea to consider inflation in your financial plans? It seems like a no-brainer, but I see Financial Advisors drop the ball all the time. They ask their client when they want to retire and how much income they want. You might think they ask about the time frame so they can adjust for inflation but sadly they often only use it to determine how many years a client has to save, completely ignoring the effects inflation will have on the client’s purchasing power during retirement. Clearly, this is a recipe for disaster. 

All too often I believe we get hyper-focused on a number. For example, you want to have $1 million at retirement and you will live on 4-5% each year in an effort to make your money last. An income of $40,000-$50,000 each year sounds good today but what will that buy in 20 or 30 years? It’s safe to say a lot less than it buys today. I believe it’s better to approach retirement planning from the standpoint of income. If you tell me that you’d like $5,000 per month after tax starting in 15 years, the first thing I will do is adjust your desired income by 2% over 15 years. This gives me a starting point of $6,730 per month. From this number, I will deduct your estimated Social Security benefit (using inflated dollars) and any pension(s) you are due. The remainder is what I call the Income Gap. Then we design a Retirement Savings Plan that will bridge the gap and ensure you don’t run out of money during retirement.

If you would like JondaKnows to design an inflation-adjusted Retirement Savings Plan for you, simply go to to schedule a free consultation.