What Does Inflation Mean for Your Financial Planning? Here’s How to Put It Into Context

When it comes to planning for our financial future, context is crucial for helping us steer a practical course through the ups and downs that are a regular part of our economic landscape.  Perspective isn’t always easy, though, especially when headlines seem to focus on each crisis du jour with equal urgency. In this article, we’ll take a look at how to put one of those headlines – inflation – into its proper context. 

To worry or not to worry?

One of the biggest myths about inflation is that it is an indication of economic instability or impending calamity. In reality, inflation is a normal part of the economic landscape whose movements we encounter regularly.

It’s true that inflation has been muted in recent years, averaging about 2% over the course of the past three decades. However, it surpassed 7% in the 1970s, and 5% in the 1980s. There was one brief decade where there was no inflation at all, and the cost of goods actually declined by almost 2% per year. Far from being an indicator of economic health, this experience of deflation took place in the 1930s and corresponded with the Great Depression.

The takeaway here is that inflation is a variable with a long-term trendline of roughly 3%. Some years will see us hovering above that average, while others will see us dipping below it. But neither inflation itself nor its variable nature are a sign of dysfunction or a cause for worry.

That doesn’t mean, however, that inflation can be shrugged off as inconsequential by those of us who want to build a future of financial freedom. Like all variables, it requires that the plans we build an account for their existence and their fluctuation. 

Paralysis, panic, or planning.

If the question is whether to worry about inflation or not to worry, then the answer lies in which approach we choose to take as we plan for our financial future.

Paralysis is the least helpful approach. Cash may be king, but it most likely will not accrue interest at a rate that can keep pace with the rising cost of living. This makes simply saving money in the bank an insufficient strategy for most people planning for or trying to enjoy retirement. The need here is to produce a stream of income sufficient to support our desired lifestyle into the future.

Panic is a close second when it comes to unhelpful approaches. We see panic take over when investors abandon a sound plan because a variable – whether it’s inflation, the stock market, or something else – does what variables do all the time: fluctuate. For the investor who gives way to panic, each valley and peak triggers an emotional pull to take action based on the headline of the day, increasing the likelihood of rash decisions that could have long-term consequences.

But when inflation is recognized for what it is, a third approach is possible. Purposeful planning paves the way for a strategy that gives investors a better chance of solving for their income replacement needs and reaching their financial goals.

Inflation-fighting investment strategies.

There are two things that are absolutely essential to creating an inflation-fighting investment strategy:

First, weathering inflation has to be baked into the process of retirement income planning. We incorporate an inflation factor into our projections, using an estimate that takes its historic trendline into account. Similarly, we factor in estimates for other variables like investment returns, taxes, and saving and spending patterns.

Second, part of your investment strategy should include inflation-fighting assets like equities. Companies have the ability to offset rising production costs by increasing their prices, allowing them to preserve their profits. This in turn is typically reflected in their stock prices over long-term investment horizons.

At N1 Advisors, it is our goal and honor to work with clients to develop a plan that is customized to their goals for themselves, their family, and their legacy. Every plan is different, but every plan is purposeful and is specifically designed to account for the many variables inherent in life and in the economic landscape.

Inflation is only a worry if it catches us unprepared. Give us a call today to talk about preparing for your future with a customized plan for long-term financial freedom.