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Minimize the Impact Inflation has on your Life

Inflation

You must think about it.  More importantly you must act to minimize its impact on your life.

Let us suppose 10 years ago you received a windfall of $1,000,000.

Let us say you decided not to spend it and you invested all of it. Congratulations! Perhaps not?

$1,000,000 in 2012 vs.2022

It depends on how you invested.

In 2012 when you initially received the $1,000,000 you could buy goods and services equal to about $1,000,000. But ten years later in 2022 the purchasing power, adjusted for inflation, had declined to $812,349. To maintain the same purchasing power, you would have needed $1,230,998 to breakeven.

Stated another way you would have needed to earn at least an annual rate of return equal to 2.1% to breakeven. Assuming a 35% tax rate on federal and state income taxes, you would have needed to earn about 3.3% to be even after adjusting for taxes. But unless you earned at least 3.3% you lost purchasing power. It is not a pretty picture, but it is one I believe we must all learn to live with.

Inflation has been only 2.1% over the past 10 years. Now it is running at about 8%. If we were to continue at 8% over the next 10 years, the $812,349 remaining in purchasing power from the $1,000,000 would now be worth about $370,555. You would need $2,657,333 to have the same purchasing power when you invested the money in 2012.

To breakeven allowing for inflation would have required a return of 5% annually over 20 years. To breakeven, allowing for federal and state income taxes assuming 35%, you would have needed to earn about 7.75%.

"I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it" - William E. Simon

We Don't Forecast

The prospect is frightening. We are not forecasting future inflation to be as high as it is now [7.9%], but we are suggesting that all of us should be adjusting and be prepared to make major changes to spending and investing over the near future.

We are urging all our clients to arrange to have their retirement income projections adjusted for higher inflation rates. One of the most important variables determining your retirement income lasting through your lifetime is the inflation rate.

Most recently completed projections we have done assumed a rate of 3-3.5%. We are now assuming a long-term rate equal to 3.5% to 4.5%.

Give Us a Call

We are encouraging all our clients to reevaluate their retirement plans and retirement income projections for higher inflation. Those of you planning retirement should re-evaluate all your assumptions and those of you already retired should be considering changing spending habits and adjusting budgets.

Please call your Private Wealth Manager to discuss.