Over the past 12 months, by far the most common question I’ve been asked is about inflation and its potential long-term effects on retirement plans.  Ever since food prices started rising about 18 months ago, inflation has increased the cost of goods and services across the US and global economy.  For people who are or will soon be retired, this has created a financial strain on their ability to maintain their standard of living and can make for some sleepless nights. 

A simple example of this is the cost of eggs.  According to the US Bureau of Labor statistics, the price of a dozen eggs rose from $1.67 in 2021 to $2.86 in 2022.  This is a 72.3% increase for America’s favorite breakfast food.  The good news is that recently the price of eggs has come down, but the cost is still about $0.60 or 36% higher over 2021 prices. 

Even though the reported inflation stats have waned to about 5% from a high of +8%, this can still be devastating to long term retirement.  A 5% rise in costs is still a significant increase year over year.  I also believe that energy prices, especially gas and diesel fuel, will increase over the summer as OPEC reduces production and Americans hit the roads for vacation travel. 

All this leads to the second most common question I am asked regarding the state of the economy and financial markets.  The only proven method of stopping inflation is for the Federal Reserve to raise interest rates.  Paul Volker did this in the early 1980s to end a 10-year inflationary period, and that resulted in the 1970s being referred to as “the lost decade.” 

Here’s how that works: Raising interest rates raises prices.  The resulting increased cost of doing business slows spending, by both businesses and families.  This has and probably will continue to result in layoffs.  This acts to slow demand for goods and services, which ultimately brings down the inflation rate.  It’s not pretty, but it can be effective.   

But raising interest rates can create other problems.  It can increase financial market turmoil (as we’ve seen recently).  It also puts pressure on pensions to meet their obligations as their assets are negatively affected by rising interest rates.  There’s also a problem for pension recipients: many pensions do not have a cost-of-living adjustment.  This means that while things cost more over time, the pensioner continues to receive the same amount of cash, which buys less and less. 

There is no simple, one-size-fits-all answer to these questions.  Solutions require attention to the issues, making choices and possibly altering long-term investment plans to meet a new reality.  The good news is there’s opportunity and clarity of focus that comes with changing times and life experiences.  At Shadowridge, we practice core values based planning and utilize active investment disciplines that are tailored and constructed to your needs through all phases of life. 

We’re here, it’s our passion to help our clients by answering their questions, presenting various solutions and consistently working with them over time.  If you have questions or would like to start learning more, please give us a call.   

Regards,