According to the U.S. Labor Department’s Bureau of Labor Statistics (BLS) the 12-month inflation rate ending August 2021 is 5.3%.
So, what does this mean? Why has inflation become a hot topic? What action should you take?
What Do We Mean by Inflation?
Not to insult anyone’s intelligence, but I also don’t want to be presumptive in my writing. If were going to talk about inflation let’s start on the same page.
Inflation: a general increase in prices and fall in the purchasing value of money. Oxford Dictionary
In other words, it the negative difference between what you could buy with $100 on a specific date versus what you can buy today using the same $100. The difference is shown as a percentage. If your $100 has less buying power, you have inflation. If your $100 can buy more, you have what is called deflation.
Simple example: Let’s say a year ago it cost you $30 dollars to fill your gas tank. Today you stop by the gas station and need the exact same amount of gas to fill up; and it costs you $42.81. The inflation rate isn’t $12.81… its 42.7% (12.81/30, difference divided by the base). By the way, 42.7% is exactly what BLS reported as gasoline’s current annual inflation rate for 2021.
Why is Inflation Such a HOT Topic?
Simple answer; it’s not something we’ve had to worry about. We’ve come to expect small incremental changes. We accept the fact our dollar will purchase less in the future and our financial plans incorporate this expectation.
Large changes haven’t really happened in the past 20 years. When we look at the data, we see at no point since 2000, has the U.S. experienced 4 consecutive months of 5% inflation. Well, that is until now. Starting in May of 2021 and continuing through August we’ve witnessed 5% inflation for 4 consecutive months.
The last time we had a similar situation was 2008. Following 3 months of 5% inflation 2008 finished strong with December coming in at 0.1%. It’s not to say we won’t experience a similar strengthening of the dollar as we move into the 4th quarter of 2021, but if the year ended in August our average inflation rate for 2021 would be 3.9%. That would be the highest inflation rate since the millennium began edging out 2008’s high mark of 3.8% and significantly higher the annual average of 2.1%.
What are the Effects of Inflation?
To be honest, it’s complicated and some of the responses can create a negative spiral effect leading to hyperinflation. In his article, “9 Common Effects of Inflation” David Floyd dives deeper into how natural human and economic responses to inflation can both help the economy as well as perpetuate the problem.
When we look at the microscale of retirees, pre-retirees and early retirement planning, rather than the macroeconomics of inflation, the effects and influencers are a little different. Let’s consider the following circumstances unique to retirement.
A fixed or semi-fixed income
Interests and dreams to pursue (travel, leisure, etc.)
Reduction of time for long term investments and market gains
What Action Should I Take?
Number 1: I can’t stress this enough; Speak with a financial advisor! There are similarities between your situation and others. However, you and your circumstances, regardless of what they are, are unique. If you don’t have a financial advisor or if you are looking for a second trustworthy opinion, please contact Baker Wealth Strategies.
When I searched the internet about “inflation+retirement” there was plenty of advice out there. Everything from keep working, invest in stocks, invest in real estate, purchase annuities and plenty more. I’m not recommending you don’t research what “experts” and the internet are saying. I’m saying, take that information and have a discussion with the someone who knows you and your circumstances. Maybe one, two or twelve of the strategies fit your situation. But then again, maybe not.
Before jumping to conclusions and doing Number 2 based on internet searches, analyze and know you’re financial picture, determine where you want to go, and listen to advice from someone who knows you and your situation.
Number 2: Don’t overreact. Often kneejerk reactions can get you in trouble. Be thoughtful and plan. The internet is full of, “do it today” sale pitches and advice. Some of the ideas and advice may be what is best for your situation. But remember there is no “one size fits all” when it comes to preparing for and living through retirement. I return to Number 1, talk it through with a financial advisor.
Number 3: Don’t sit and do nothing. Be engaged. Too often we sit around waiting for things to “get back to normal” or go back to “the way they were”. Crazy update — things will never do this! The world, circumstances and opportunities move forward. There is a distinct difference between patience and idle. Don’t be idle, act and I will reiterate one more time see Number 1!
