Year-0ver-year, All Items inflation through November 2020, averaged 1.2 percent. Core inflation, excluding food and energy costs, averaged 1.6 percent. The U.S. Federal Reserve bank has an “inflation target” of 2 percent annually. Per the Fed, an annual inflation rate of 2 percent “is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing and investment, which contributes to a well-functioning economy.”

There you have it, inflation as a federal policy. How does a 2 percent annual decrease in your money’s long-term buying power contribute to your personal or family’s “well-functioning economy?”

The numbers quoted above are averages. How do price pressures impact the things you use and need frequently? The cost of food in general through October is up 3.3 percent year-over-year. If you have hungry teenagers at home, especially boys, personal food expenditures are probably up by more than the index. With work-from-home mandates, fuel costs most likely are down for the year for some workers. But as vaccinations kick in and the economy increasingly revs up, transportation expenditures are likely to increase. The new administration’s emphasis on climate change will increase the cost of fossil fuels, electricity, transportation and shipping costs, etc. Infrastructure spending could increase pressures to raise fuel taxes.        

What are the Big Three goals for most families? One, own a home; two, educate kids; three, retirement financial independence. New home sales have jumped to a 14-year high. Big city woes and “work from anywhere trends” are driving people to the suburbs, exurbs and smaller towns. List prices are up an average of 13 percent nationwide over 2019 through November 2020. Record low mortgage rates fuel demand, even as many younger couples are challenged to come up with down payments. Lumber prices are up 170 percent since April, adding $16,000 to the price of an average new single-family home.

Some students and parents are questioning the relative value of a high-priced private college education, but even costs at public colleges have outpaced inflation. Between 2008-2018, average four-year costs across all 50 states have jumped 34 percent overall, 24 percent adjusted for scholarships and grants. Georgia has cut funding to public colleges substantially over the last decade.

People in general are living longer, spurring increased longevity planning. Inflation and taxes warrant consideration. Say you want to have at least $1 million in your 401(k), IRA, or other qualified retirement plan by retirement. You want to take out 5 percent per year to fund your lifestyle, $50,000 per year. The withdrawal is taxed as ordinary income. Suppose your combined average federal and state tax rate is 20 percent. Now you have $40,000 per year, $3,333 per month to spend. How does that fit into your retirement “go-go years” scenario filled with travel and experiences? Need $2 million plus in your nest egg? With the deficits we’re running as a country, at some point, taxes will rise, and most likely, so will inflation.

If you retired 10 years ago, it now takes $1.19 to buy on average what $1 bought in 2010. Suppose you live 25 years in retirement. For someone who retired in 1995 it takes $1.71 to buy what a dollar did when they retired. But that’s not the whole story. Health care costs continue to rise, and in the “slow go” and “no go” retirement years, that becomes an even bigger burden on retirees, and those that love them and who may have to care for them. Many of you reading this are senior citizens, or will be at some point. How are you planning to avoid being a strain on adult children? Many clients, especially women, who on average outlive husbands, are quick to say in essence, “I love my kids, but I don’t want to be a burden on them or live with them!”

Elder care attorneys have seen an uptick in business as pandemic scares have forced people to confront mortality. Do you need to update your living and testamentary estate plans? Are wills, trusts, powers of attorney up-to-date? Read them again. Are executors, trustees, beneficiaries, and attorneys-in-fact still alive, still capable? At your current age, as you look forward, is your insurance portfolio (heath, life, disability, property and casualty, liability and umbrella liability) current, providing adequate “what if?” coverage? Inflation impacts the buying power of insurance settlement dollars.

Inflation, simply, is shrinking buying power. Taxes further diminish buying power. Save and invest wisely!

Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;lewis@lewwalker.com.  Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of  SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.

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