Inflation & It's True Cost
Welcome back to another episode! Inflation affects everyone differently and in todays episode we walk through it. What does it look like for companies? How do we see inflation impacting pre-retirees?
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Full Transcript:
00:00:07:01 - 00:00:27:03
Garrett & Paul
Hello and welcome to your investment partners with Paul and Garrett, where we talk about all things financial, focusing on helping you plan, keep and grow for a successful future. If you're new to the podcast, welcome. And if you're tuning in again, welcome back and thank you for listening. Hello and welcome to episode five of your investment partners with Paul and Garrett.
00:00:27:17 - 00:00:50:00
Garrett & Paul
Today we're going to talk about inflation. What is true cost is what you should do about it and what we're doing here for our clients. My name is Garrett Smith and we look forward to you being with us today. Well, here we go again. Number five. You ready? I'm ready for this one. This is a good one. It's been on everybody's mind, along with kind of the market conditions were recording this at the 1st of August.
00:00:50:00 - 00:01:13:01
Garrett & Paul
But today we're going to kind of talk about inflation and some ideas about what we can do and how to handle or at least consider when inflation is rising faster than normal because it's always there. And I think that's the kind of the tricky part of it that never goes away. Yeah, it does. It always just creeps on your portfolio all the time.
00:01:13:01 - 00:01:34:10
Garrett & Paul
And I've always felt like that inflation's probably the biggest risk in retirement planning because it's, you know, when we have market volatility in the markets go down or they go way up, I mean, it's very noticeable on your statements and stuff like that. But inflation is just kind of the silent thief. It's just kind of it's always there.
00:01:34:11 - 00:02:01:14
Garrett & Paul
It's always, you know, pecking at year in a good year, it's, you know, one or 2%. And in a bad year, it's 9% like we've had, you know, over the last 12 months. And and so it's it just it just it's just that constant, constant creep on a portfolio and the cost of living. Yeah. And I think also inflation is just it impacts everything sometimes when it's just one area or another.
00:02:01:14 - 00:02:22:09
Garrett & Paul
But when you get, you know, full blown economy wide inflation, it it impacts not only the investments but what you're living on, what cars cost, what food costs, and it just trickles to everything. And so it feels like when you get fast paces of inflation, the dollars just aren't going as far because they're not right. And it just impacts everybody's decision making.
00:02:22:14 - 00:03:02:06
Garrett & Paul
You know, people start delaying purchases, you know, oh, we can't really afford to replace the car. We, you know, well, maybe we'll buy one shirt instead of two. And so it just it really it's not just the cost of things, but it's the it's the decision making that it it affects the economy negatively. Yeah, I think we've seen that in client conversations, too, of just there's anytime with inflation on the rise, there's a prioritization of where the spending is going and and everybody feels that I there's no escaping inflation anywhere anywhere and it gets all of us.
00:03:02:06 - 00:03:20:01
Garrett & Paul
And I think one thing to consider, too, is is as inflation erodes away, the rate of inflation plays a big effect. I think you have a great chart there that kind of covers what purchasing power feels like over time, what you know, even though you still have the same amount of dollars, what it feels like it can buy you over time.
00:03:20:15 - 00:03:44:00
Garrett & Paul
Yeah, it's an it's, it's really interesting the impact that it has. So the chart shows different inflation rates, you know, a low rate of two and a half percent. It goes on up to 10%. I kind of picked the column that shows inflation at about seven and a half percent because that's that's kind of in the ballpark of what we've been running here for the last 15 months or so.
00:03:44:15 - 00:04:16:09
Garrett & Paul
And if you have $100,000 in today's dollars at a seven and a half percent inflation rate in only ten years, so ten years from now, you still have 100,000. But the purchasing power is only $48,000. So your your purchasing power is cut in half at a seven and a half percent inflation rate. So just envision a time period where the cost of everything doubles in ten years.
00:04:16:09 - 00:04:48:20
Garrett & Paul
And it's just it's absolutely devastating. Over 20 years, the purchasing power drops clear down to $23,000. So, you know, somebody retires at age 65, they have $1,000,000. 20 years later. The purchasing power of that million dollars is only $230,000. That that just wipes out, you know, long term portfolio as far as being able to buy goods and services with those same dollars.
00:04:49:16 - 00:05:11:09
Garrett & Paul
And and so it's we really have to be aware of it at a normal a more normal two and a half percent inflation rate. The ten year numbers still not great, but it is 78,000 instead of 48,000. So at a at a normal two and a half percent inflation rate, you know, you're still eroding your purchasing power 20 years later.
00:05:12:09 - 00:05:44:07
Garrett & Paul
That 85 year old, instead of purchasing power for $100,000, it's only 61,000. So even at a low inflation rate, purchasing power in retirement is is really chewed up. And the the higher the inflation, the faster it goes. It's just we just have to we just have to plan for that. Yeah. And if you saw those numbers on your statement of the 100,000 shrinking, it would feel very different than when it's just chipped away a little bit at every day and you still have the same dollar amount.
00:05:44:12 - 00:06:05:12
Garrett & Paul
They're just not going as far. And that's, I think, the one of our biggest worries for all of our clients in retirement because they're so long now. You know, we have many people that in their fifties are retiring and you start looking at a 40 or 50 year retirement with what inflation does. And that is a very different conversation than what inflation does over four or five years.
00:06:06:04 - 00:06:32:19
Garrett & Paul
Right. And all of our long term retirement planning. So those of you who are in familiar with the term envision plan it it calculates in a long term inflation rate. And so that's that's one of the ways that we help clients quantify. Do they have enough money to, uh, to retire comfortably, comfortably with inflation adjusted dollars? You can't just look at it in terms of simple math.
00:06:32:19 - 00:06:56:12
Garrett & Paul
You have to you have to look at your purchasing power long term. And that's what that tool is for us to help us kind of guide us on that. Yeah. And in retirement, you know, the biggest cost generally are taxes and inflation. Taxes we see because you generally write a check for it or it's withdrawn from the account where inflation you don't necessarily see, you just don't have as many dollars going as far.
00:06:57:13 - 00:07:18:19
Garrett & Paul
And so I think kind of the big conversation we wanted to have along these lines is what do we do about it? We can't stick our head in the sand and just ignore it. It's part of every conversation we have. It's part of every retirement plan. And so I think kind of the first thing to consider when what to do about inflation is to kind of get an understanding of what the day to day costs are.
00:07:19:10 - 00:07:39:09
Garrett & Paul
When everything costs more and it's going up every month, I think sometimes it gets just swept into the budget or into kind of just the everyday spending. And I think getting an understanding of actually what some things are costing you can kind of help the long term plan of of knowing, okay, what am I actually spending today on energy and gas and groceries and, and on down the list.
00:07:39:11 - 00:07:59:01
Garrett & Paul
Yeah. And I think that's one of the problems that we have is, you know, as we get older and more affluent and there's, you know, it's just feels like there's more money around because you don't have, you know, kids in braces and, you know, just college expenses and just all the stuff that adds up on a young family over time, you know?
00:07:59:01 - 00:08:23:02
Garrett & Paul
So you just have a tendency to budget less. And I know I budget I don't budget at all anymore. And so during inflation, it's probably good to know, hey, we're you know what? Where is our money going? That's one tool that we can use is just, you know, dial back into those days where there's a little bit more of a scarcity mindset and just say, where are we spending money?
00:08:23:02 - 00:08:44:21
Garrett & Paul
And what what's costing us a lot more this year than than it cost last year. And just see if there's areas where, you know, maybe we're overdoing it a little bit and that's what a budget does. It just helps you, you know, kind of dial in what your spending actually is. Yeah. And, you know, I'm on the other end.
00:08:44:21 - 00:09:12:21
Garrett & Paul
We're tracking every dollar we spend and keeping a close eye on it. But I think there's something to be said of just knowing when everything costs more, knowing how much more it's costing to just keep you from really getting ahead of yourselves. Because usually when periods of high inflation, the market's not doing as well. And so if you're we, you know, relying on portfolio withdraws to fund that, you can easily spend more but kind of have some erosion on that on the portfolio as well.
00:09:12:21 - 00:09:37:02
Garrett & Paul
So there's a tradeoff there of knowing actually how many dollars you need and how many you're spending. And so I think the other area to kind of talk about is, is maybe our portfolios, what we do in periods of high inflation of just kind of thinking through what we do with kind of those three main areas stocks, bonds, cash and, you know, kind of when we're in periods of high inflation, what do you think is the starting point to do?
00:09:37:02 - 00:10:02:16
Garrett & Paul
Well, that that's an interesting question because, you know, things obviously need to be adjusted. And having just gone through this kind of the news cycle of inflation is here, Obviously, it has a kind of a negative impact on, you know, all three areas of the of the portfolio. So, I mean, the cash is there. But the problem with the cash bucket is, you know, it pays a low rate of return.
00:10:02:16 - 00:10:32:15
Garrett & Paul
And when inflation's running at seven or eight, you know, obviously we're just losing ground there. But we are looking at the cash area and and because the Fed has increased short term interest rates, there are opportunities there in that that cash position to to get a better yield. We're not going to get seven or 8%, obviously. But if we can move it from, you know, point one to, you know, two or 3%, then that softens the blow a little bit, I think.
00:10:32:17 - 00:11:01:04
Garrett & Paul
Yeah, I think cash is really key to kind of consider during rising inflation when interest rates were low and basically paying nothing and inflation was know was was low, you could kind of get away with holding a little bit extra cash and didn't have to be as conscious about that. But looking at those trying to find areas where you can still maintain some low risk or risk free dollars, but getting a higher rate of return instead of just sitting in a checking or a savings account is is something that I think is really critical.
00:11:01:04 - 00:11:36:09
Garrett & Paul
Look at just so you're not drifting too far behind on your cash purchasing power in the short term. Yeah, I agree. And then the bond bucket, you know, there's kind of a a direct impact on the on the bond portfolio because as as inflation's there and the bond market gets worried about extended inflation or the and the Fed starts to raise interest rates on the short term, it really has a negative impact on on our bond portfolio because when interest rates go up, bond values go down.
00:11:37:05 - 00:12:21:13
Garrett & Paul
And so the adjustment that we're that we're currently making is where we're shortening the duration of our bond portfolio. And so instead of having a one year and a two year and a three year on out to ten years, we're we're adjusting from the, you know, that six, seven, eight, nine, ten year position and and shortening the the the bond maturity and the effect of that is that the the rate of return on the bond portfolio as far as the the interest rate we're getting is not going to change much at all, but it will preserve the value of the bond portfolio if we shorten that duration down.
00:12:21:18 - 00:12:43:01
Garrett & Paul
Yeah, and I think that's something that's just unique of the period that we're in right now, where short term interest rates have risen higher than long term interest rates. So it allows us to shorten the duration and still continue to get a reasonable rate of return on that bond ladder where we don't have to necessarily where previously we kind of had to reach out a little bit longer just to maintain some yield.
00:12:43:01 - 00:13:06:16
Garrett & Paul
And so it's a great move in that it helps kind of reduce the the longevity risk while maintaining the higher at least a little bit better of a yield than what we've been able to get historically. And then I think when it kind of trickles over into stocks, all these companies are wrestling and fighting with the with the same thing, you know, big, well-established companies, you know, behind the scenes.
00:13:06:16 - 00:13:23:09
Garrett & Paul
And they talk about it in their earnings calls about, you know, what do we do about inflation and how they're handling it. And a company that's been around for more than a few years has had to wrestle with inflation because of this erosion. They're doing with the same things that the kind of the person you know, us personal spenders are.
00:13:23:21 - 00:13:53:03
Garrett & Paul
And so it's, you know, the brightest minds working through how to just navigate that that's best for their company and if and you know, generally speaking, if a company doesn't grow faster than inflation over time, it kind of ceases to be a company. And so they that longevity if we can get that's once again if we can give those stocks enough time, they generally historically have been able to grow faster than inflation to help us kind of keep up or even surpass the erosion that inflation causes.
00:13:53:20 - 00:14:20:01
Garrett & Paul
Well, and these big companies have you know, they have pricing advantages. You know, most of them are, you know, kind of unique in their in their industry. There's, you know, certainly competitors around. But everybody's dealing with the same problem of inflation. And, you know, if there's if there's a million places to buy something, you don't have any pricing leverage.
00:14:20:01 - 00:14:41:06
Garrett & Paul
But if there's only three or four places to buy the same thing and all of them are dealing with inflation, they're just going to raise their prices. And and so stocks over time are able to work out the the impact of inflation over time. You know, the the problem we have in the short term is just the uncertainty.
00:14:41:06 - 00:15:08:03
Garrett & Paul
We say this all the time is that the the the stock market just hates uncertainty. It just doesn't like to to wonder about. Well, what's the Fed going to do and water interest rates going to be? And that's when the market corrects and when even when the clouds start to clear, even though the news is still bad, if the clouds start to clear a little bit, the market will will find its footing and go, okay, we can we can deal with this and we can see our way forward.
00:15:08:03 - 00:15:30:14
Garrett & Paul
And then, you know, we get a little bit of a rally in the market, which is kind of what we've experienced here in just in the last month or so. We've got a relief rally going on. Hopefully the worst is behind us. We don't know. Time will tell, but the clouds have cleared a little bit. News is still bad, but the clouds are cleared a little bit and the market is reacting positively because it it feels like, okay, maybe we can deal with this.
00:15:31:03 - 00:15:48:01
Garrett & Paul
Yeah. And I think that's another reason why we like the dividend paying companies is because they return cash today. And so you can either if you need it for income, you can use it without having to sell the company, which is great in periods of volatility or you can reverse it, reinvest at the lower rates if the company has come down in price.
00:15:48:17 - 00:16:07:16
Garrett & Paul
And so I think that's another reason why we we kind of lean on the backbone of those dividend paying companies for our portfolio because it kind of gives us that flexibility of of dollars today without necessarily having to sell or or cause a liquidity event. Yeah. And I think the last area to talk about is just Social Security.
00:16:07:16 - 00:16:32:06
Garrett & Paul
Everybody has got basically everybody has Social Security and there is a cost of living increase that is pegged to follow inflation. It's usually a little delayed just because of how inflation takes effect versus when they're able to raise raise that rate. And I pulled up a little chart here from the Social Security Administration, and obviously for 2021 into 2022, there is a 5.9% increase.
00:16:32:18 - 00:17:03:10
Garrett & Paul
But going back to the ten years before that, it was it was really low, 1.3 in 20, 21.6 in 2019, 2018 was 2.8, 17 was 2.0. 2016 was point three, 2015 was zero. And so you can just see that there is an increase which does help offset costs. It's one of the beauties of Social Security and and folding it into retirement plan, but it's often delayed versus when inflation actually hits us.
00:17:03:21 - 00:17:26:19
Garrett & Paul
And my guess is, too, that it doesn't quite keep up with real inflation. You know, it's I've heard people often say, yeah, they they gave us, you know, 2%. But then our cost for our Medicare went up by 4% or something like that. And so it it definitely helps. I mean, any time we can get a bump in in the check, it's going to help.
00:17:28:00 - 00:17:46:23
Garrett & Paul
But but Social Security, as a general rule, is probably not going to keep up with the real cost of living, as is probably the, you know, kind of the idea there. Yeah, definitely. Over time, you know, the longer the time horizon, those are kind of the major areas I wanted to cover. Do you have anything on inflation that you wanted to add?
00:17:47:03 - 00:18:05:04
Garrett & Paul
Now just remember it's the silent thief and be aware of it and we're dealing with it as best we can. And and it'll all work out at some point. And just be careful out there and do the best you can with it. That's all you can do. Yeah. And I think if you want to talk about your specific situation, just give us a call.
00:18:05:04 - 00:18:28:14
Garrett & Paul
You know, we're always happy to look through a portfolio, look through spending habits and and work through all that. But other than that, I guess thanks for joining us today. And until next time. All right. Thanks. Thank you for tuning in and listening to your investment partners with Paul and Garrett. If you like what you heard, be sure to subscribe to our podcast on iTunes, Spotify, or wherever you get your podcasts.
00:18:28:23 - 00:18:50:09
Garrett & Paul
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00:18:50:18 - 00:19:17:08
Garrett & Paul
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00:19:17:15 - 00:19:32:19
Garrett & Paul
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