Ep # 60 - Don't Overlook Inflation: Strategies to Protect your Retirement Income
Joe and Lindsay examine the little-discussed sequence of inflation risk. While most people plan for retirement with a fixed, average inflation rate, it’s important to consider the sequence in which inflation rates fluctuate over time.
Drawing from the insightful article “How Sequence-Of-Inflation Risk Impacts Retirees Beyond Just Sequences of Returns” by Michael Kitces, they explore the real-world impact of variable inflation and how it can interact with the sequence of return risk.
The discussion highlights the significance of maintaining flexibility in your retirement strategy, using dynamic spending, and even keeping a well-allocated portfolio with stocks to act as an effective hedge against inflation. If you're looking to enhance your retirement planning and safeguard your financial future, this episode offers valuable insights and strategies to consider.
What You’ll Learn in Today’s Episode
Sequence of Inflation Risk: The podcast highlights the often overlooked concept of sequence of inflation risk, which refers to the order in which inflation rates fluctuate over time. While many retirement plans assume a static, average inflation rate, real-world scenarios reveal that inflation can vary significantly from year to year.
Combating Sequence of Inflation Risk: To address the sequence of inflation risk, the hosts emphasize the importance of flexibility in retirement planning. They discuss dynamic spending strategies, guardrails, and the use of investment buckets to navigate changing economic conditions and inflation rates effectively.
Stocks as an Inflation Hedge: Contrary to common beliefs about conservative portfolios in retirement, the podcast suggests that having stocks in a retirement portfolio can serve as a strong hedge against inflation. Stocks tend to perform well over the long term and can help retirees maintain their purchasing power when inflation rises.
Monte Carlo Analysis: The hosts mention the use of Monte Carlo analysis in retirement planning, which involves adding risk factors to average return assumptions to simulate various future scenarios. This analysis helps individuals and financial planners understand the range of possible outcomes and plan accordingly but shouldn’t be relied upon solely.
Ongoing Retirement Planning: The podcast emphasizes that retirement planning is not a one-time event but an ongoing process. It's essential to regularly review and adjust your retirement plan to account for changing economic conditions, inflation rates, and life events. Collaborating with a financial advisor who specializes in retirement planning can provide valuable guidance in this process.
Ideas Worth Sharing
· "The problem with just putting a specific return in our projections is that those returns come in different orders."
· "Financial planning is not a one-and-done event."
· "Projections aren't plans because they don't tell us when we need to adjust, when we're off track or on track."
· "One of the best ways to plan for inflation is to make sure that we do have stocks in that growth bucket in our portfolio because that's going to be our best inflation hedge."
· "We don't necessarily want to default to a really low amount of stocks in our portfolio because we're retired now."
Resources in Today’s Episode
“Is Jeremy Siegel Right About Stocks for the Long Run?” by David Blanchett
Ep # 150 - Rational Reminder Podcast – The Ultimate Inflation Hedge
Ep # 6 – YRPS – Retirement Risk # 1 – Sequence of Returns and Why the Game Changes in Retirement
Ep # 7 – YRPS – Retirement Risk # 2 – Longevity
Ep # 8 – YRPS – Retirement Risk # 3 – The Risk of Being Too Conservative
Ep # 9 – YRPS – Retirement Risk # 4 – Inflation Risk
Ep # 10 – YRPS - Retirement Risk # 5 – Healthcare Expenses
Ep # 13 - YRPS – Safe Withdrawal Rates and Traditional Retirement Projections
Ep # 14 – YRPS – Dynamic Withdrawal Strategies
Mastering Inflation Risk: Expert Tips for Securing Your Retirement
Do you want to ensure a comfortable and financially stable retirement? Are you looking for a solution that can help you achieve this result?
In this podcast, you will be able to:
Uncover the crucial aspect of considering inflation risk in your retirement planning.
Equip yourself with strategies to tackle sequence of return risk, bolstering your retirement fund.
Perceive the impact of unstable inflation on the effectiveness of your retirement strategy.
Decode the relevance of stocks in counteracting inflation within your retirement portfolio.
Pinpoint the demand for adaptability in retirement planning to brave unpredictable economic climates.
Sequence of Inflation Risk
Understanding inflation and how it impacts your retirement savings is crucial for retirement planning. An often-overlooked element within this context is the 'sequence of inflation risk'. This isn't about an isolated increase in prices over time, but rather about the unpredictability and variability of inflation throughout your retirement period. These fluctuations can deeply affect the buying power of your savings, leaving unexpected holes in your retirement plans. We discuss the common disregard for inflation variability in retirement planning. We reflect on past periods of high and low inflation, often dictated by national and global economic climates.
However, tools like dynamic spending and strategic portfolio segmentation can actually play crucial roles in rebuilding this stability. ,The aim is to tailor spending and saving habits according to fluctuating market and inflation rates. By creating 'buckets', you craft a plan that's flexible to changes, ensuring you're prepared to ride the waves of inflation.
Managing Risk with Balanced Portfolios
Developing a balanced portfolio, considering both shorter-term spending and longer-term growth, allows for an effective dispersion of risk. The strategy here is to allocate safer assets for immediate spending needs while allowing riskier assets - that often entail higher returns - the time to grow and produce dividends. It's all about understanding your tolerance of risk and your ability to navigate market volatility. A financial plan is about creating a tailored suit, not buying off-the-rack. It's necessary to consider individual circumstances, including lifestyle choices and financial demands.
Sequence of Inflation Risk
Understanding inflation and how it impacts your retirement savings is crucial for planning the later stages of life. An often-overlooked element within this context is the 'sequence of inflation risk'. This isn't about an isolated increase in prices over time, but rather about the unpredictability and variability of inflation throughout your retirement period. These fluctuations can deeply affect the buying power of your savings, leaving unexpected holes in your retirement plans. There is a common disregard for inflation variability in retirement planning. Reflecting on past periods of high and low inflation, often dictated by national and global economic climates, there can be a significant potential impact on retirement.
Addressing Sequence of Inflation Risk
Injecting a measure of stability into the uncertainty of retirement finances might sound like wishful thinking. However, tools like dynamic spending and strategic portfolio segmentation can actually play crucial roles in rebuilding this stability. Here, the aim is to tailor spending and saving habits according to fluctuating market and inflation rates. It’s possible to break up the retirement nest egg into organized, spendable portions called 'buckets'. It’s a bit like party planning. You know you need food, drinks, and decorations, each representing a different future expense. By creating these 'buckets', you craft a plan that's flexible to changes, ensuring you're prepared to ride the waves of inflation.
The Importance of Stocks in Inflation Planning
Stocks can be unpredictable. But in the macro perspective of retirement planning, they are one of the most effective inflation deterrents. Simply speaking, stocks offer the potential for growth that can outstrip inflation, ensuring your portfolio doesn't lose its relative value over time. Stocks exhibit reduced risk compared to bonds when accounting for inflation. But this can be mitigated by maintaining a growth bucket filled with stocks to combat inflation over time.
The resources mentioned in this episode are:
Visit the Court of Trisport website to learn more about their events and how you can get involved in raising money for local charities.
Check out Michael Kitz's blog article on the sequence of inflation risk to gain a deeper understanding of this often-overlooked topic in retirement planning.
Consider implementing dynamic spending strategies in your retirement plan to help mitigate the risks of sequence of return and inflation.
Explore the use of Monte Carlo analysis in your financial planning software to better understand the range of outcomes and potential success rates in your retirement plan.
If available, use financial planning software that incorporates variable inflation scenarios to more accurately model the potential impact of inflation on your retirement portfolio.
Take into account the potential benefits of maintaining a higher allocation to stocks in your retirement portfolio to help mitigate the risks associated with variable inflation.
Review the chart provided by David and Joe Curry in the show notes for further insights and recommendations on planning for sequence of inflation risk.
Consider consulting with a financial planner or retirement specialist to discuss your specific retirement goals and create a customized plan that addresses sequence of inflation risk.
Simply speaking, stocks offer the potential for growth that can outstrip inflation, ensuring your portfolio doesn't lose its relative value over time. Over a timeframe of five to seven years, stocks exhibit reduced risk compared to bonds when accounting for inflation. is important to maintain a growth bucket filled with stocks to combat inflation over time.