Key Points Covered in this Podcast:
- Inflation is a silent wealth disruptor that compounds over time, gradually reducing your purchasing power.
- Fixed expenses like healthcare and housing often inflate at much higher rates than the average consumer price index.
- A static financial plan may offer less flexibility; consider a dynamic withdrawal strategy that adapts to market fluctuations.
- Investing for retirement, rather than just saving, can help keep pace with inflation and support your financial future.
If you want to worry your problems into existence, put your money under the mattress.
Transcript
John Walker
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, a Regional Vice President at Mercer Advisors.
Jason O’Meara
And I’m Jason O’Meara, CERTIFIED FINANCIAL PLANNER™ and market leader at Mercer Advisors.
John Walker
And Jay, today we’re going to talk about a topic that I think is really relevant in the news. That’s certainly for sure, right? Pretty timely, and I think, you know, we often take inspiration from what we’re going to discuss on what we’re hearing from the families that we get the privilege to work with and the questions that we’re getting. And it used to be, you know, when we built financial plans, you know, good financial planning always has to account for inflation.
Jason O’Meara
What silent, the silent disruptor, right, inflation.
John Walker:
It’s a headline, right? It’s something that the media uses. It catches people’s attention. It certainly is something real. It’s something that people really feel at the grocery store, you know, with taxes, with their insurance, with health care. And so what used to be just headline news is now a proper line item in most families’ expenses.
Jason O’Meara
I feel like there was this long period of time where we had really low inflation, sub 2%, and when you’re dealing with numbers that small, you didn’t notice it on a $6 item. What’s 2%, you know what I mean? You really don’t notice it. It feels nominal, and companies are incredibly good at hiding it. Yep, so you know, you may look at the grocery store and say, well, that price hasn’t changed at all, yet the box has gotten slightly thinner.
John Walker
Yep, a little here. Price is the same, but you’re paying the same price for just a little less, right?
Jason O’Meara
Yeah, exactly.
John Walker
And so the danger of inflation over long periods of time, it really can erode your purchasing power. And what we’ve found when you look historically, even when you have those lower periods of inflation as you suggested, right, where we did have a long decade of rather low historic inflation, and yet it’ll feel like it’s cooling. There’ll be news reports about it cooling. There’ll be all these things. I think it’s important we caution folks, don’t be fooled, right? Prices don’t go backwards typically.
Jason O’Meara
Uh, I think that that’s worse, honestly.
John Walker
Yeah, and I think the most recent, you know, great example of that is we obviously had inflation due to, you know, shipping disruptions and global disruptions during COVID when there were lockdowns and other things, and it disrupted pricing in a variety of ways. But when the world went back to a more normal order, prices didn’t come back down as a result of that. People got accustomed to paying those prices. Manufacturers and producers got used to charging those prices, and margins kind of stayed the same.
Jason O’Meara:
Well, what happened there, yeah, like if you remember that, I remember that through the news, like, OK, cool, inflation went from 9% year over year to 3%. I was like, oh, inflation came down. No, those prices stayed the same. We just increased those prices by 3% now. So you know, exactly, it’s a misleading, it’s a very misleading headline and it’s a very misunderstood principle in economics where I feel most people I talk to, they don’t understand inflation. They don’t understand how it will affect them. And it’s why, I mean, John, we’ve said it how many times, don’t save for retirement, invest for retirement, and that’s why investing for retirement makes a ton of sense.
John Walker
Absolutely, and you’re right, inflation does its work over time, right? And you know if retirement goes to plan, that’s the thing that most retirees have the most of the time, right?
Jason O’Meara: Exactly, you know, it’s the one commodity, right?
John Walker
And so while 3%, as you said earlier, doesn’t sound like much, right, that’s the average historic inflation rate for folks listening and why we keep speaking to it. It doesn’t sound like much until you realize that in a 25-year span, 3% compounded inflation cuts your purchasing power in half.
Jason O’Meara
Yeah, that means one thing if it was 3% over that time, no, but you just hit on something I want to just double click on here. It’s compounded. So your 3% interest next year gets 3% interest, right?
John Walker
And we see the value of compounded interest in a positive light when it comes to saving and investing, right? That is how you can accumulate significant wealth by allowing the power of compounded interest to grow your resources, but it’s eroding it in a similar manner if you’re not addressing what inflation does over time. Jason, you’ve heard me say this to probably thousands of families. It’s planning. It’s an active verb, not a plan, because what we find is where most plans break in this is they’re static. It’s not that they’re bad or they’re poorly constructed.
It’s just they’re static, and they’re not actively addressing this, and inflation is very much an active impact to you. People think in terms of what’s the impact of, you know, a volatile market. What if the market does X, Y, and Z? What is that going to do to my plan? But if you don’t account for what your dollar spent today is going to, you know, what you’re going to need to replace that in 5, 10 years, the erosion of your purchasing power, that what you buy today with a dollar 10 years from now, that same dollar won’t buy the same amount of goods. How do you address that, right? I mean we see it. I think groceries are an easy one to look at. If you were spending $10,000 a year on groceries today, right, at 3% inflation, fast forward 25 years, that $10,000 is a $21,000 annual spend.
Jason O’Meara
Right? Exactly. So how do you look backwards, right? If you want good examples, look what things cost in the nineties compared to what those same things cost today, right? I mean, if you’re someone saying inflation is not that bad, look back. I mean, I was just having this conversation with my wife on Friday about cars and how insane I think car pricing has gotten.
John Walker:
Cars, fuel, I mean, I know fuel’s in the news because of world events, but my kids marvel and probably think I’m a dinosaur when I tell them that when we first started driving, my wife and I were paying less than $1 a gallon for gas.
Jason O’Meara
It’s 99 cents a gallon.
John Walker
That if I could scramble together a $10 bill, I could probably fill my car, right? And so those days are long gone, right?
Jason O’Meara
Exactly, exactly.
John Walker
But you need when you’re planning to address these things, right? If you don’t plan to have your income keep pace, you’re faced with some very difficult choices, right? You’re either going to have to create an additional income source to account for that inflation or your lifestyle is going to have to change, right? Because it might require a re-budgeting of things that you don’t want, right?
If you like to travel, you might have to take fewer trips. If you like to go out to dinner, you might have to cut that back, right? You certainly don’t want to be faced with tough decisions like, hey, do I cut back on some things I do for my healthcare, or the things that are good for me, or let’s even more positively, hey, maybe you had intentions of funding 529s for grandkids or gifting to children or your charities that you really value, and now you can’t afford those, right?
It will have a material impact on your wealth. And it does it quietly and in the background and it’s not always something that you’re really thinking of, right? And so I think it’s really important, Jason, that we talk about this and talk about the ways that good plans actually address this. And Jason, I think the most dangerous myth of this is that like I’ll just spend less, you know, I’ll tighten up my belt, we’ll cut our discretionary spending like, no, you won’t. Let me say it again, no, you won’t.
Jason O’Meara
For the people in the back.
John Walker
You will not. Like, at least not where it actually most materially impacts you or matters, right? You can cut out some discretionary things, right? You can trim your travel. You can maybe buy less clothes, go out to dinner a little less, right? Yes, yes, you can. I don’t mean to diminish those, but that’s where the impact is least, if that’s the most minimal impact, right? The fastest rising inflation that you will face are the things that you really don’t have a lot of flexibility with, right? It’s gonna be things we just talked about: healthcare, housing, whether it’s the price of your home, the taxes as a result of that, the insurance as a result of that, the maintenance on this, your food costs, your utilities.
You’ve got to eat, you’ve got to eat, you know, you need gas. Those aren’t like lifestyle choices, right? You can’t just say, I’m not going to eat this month. These are the non-negotiables, and they’re the ones that actually have higher inflation than most anything, right? It’s not a straight line. Not everything’s impacted the same.
Jason O’Meara
Well, you think about John, that 3% number we keep saying that’s an average inflation amount, right? So that’s averaged over the consumer price index, right? But if you look under the hood there, not everything inflates at the same rate. Healthcare is one of the fastest and the highest inflation rates, right? Even in our plans, John, we had 6% inflation rates on healthcare. Right. Just because it’s gonna outpace inflation. I mean, everyone knows, go to the doctor, go get medicine. You’ll see inflation in full swing there, right?
John Walker
Absolutely. And the last place we want families tightening the belt…
Jason O’Meara
Yeah, exactly. You don’t want to adjust your medication and, you know, being able to eat, housing, like we mentioned, housing maintenance and housing cost of heating oil or natural gas, all these things, they fluctuate, right? So they will rise at a quicker rate than everything else.
John Walker
And as we’ve said for the people in the back, right, it’s not, hey, I’ll just spend less. That is not everywhere can be reduced and it’s not a strategy. It’s a hope and a prayer, right? It’s not something that you can plan for. And so how do you address that, right? They’re non-negotiables. You have to be able to afford these things to enjoy retirement, to comfortably live. So like, let’s dispense with the, hey, we’re going to tighten the belt, right?
Jason O’Meara
Yeah, what I usually find, John, is the actual psychology around that is just basically avoidance, right? There’s a problem here. I need to have a plan towards it. Oh, forget it. I will just trust future me to figure it out. Future me is unreliable. Future you is the same as present you. You – just at a later date.
John Walker
Absolutely. And you know, you need a strategy plan. You need a plan. You need structure. You shouldn’t need to sacrifice, right? We need to figure out how do we address this because this is the silent killer. This is the thing behind the scenes that’s truly eroding your wealth.
Jason O’Meara
So, but I would personally say one of the biggest things we could focus on as part of your plan is I said it earlier on, don’t save for your future, invest for it, right? Most times people confuse safe and stable as the same thing, when it’s really not. You know, I always say if you want to worry your problems into existence, put your money under the mattress. Right. So every year that pile of cash is worth less. Not even talking about, even if you didn’t take a penny out of it, but like John mentioned, the spending power gets reduced considerably. And then over 25 years, that pile of money could have been earning you money and solving this problem for you while you slept. Instead, you slept on it and now you actually are facing these problems you were trying to avoid, right?
John Walker
You’re not saving your money, you’re just shrinking it slowly over time, right? And so, you know, we confuse stable with safe, right? And no one’s suggesting, right, with the money that you need for cash flow that you need to be reckless, right?
Jason O’Meara
No, of course not. But there’s investing and there’s gambling, right? We want to invest. We don’t take risks and chances with your money. We want to do things that are predictable and repeatable.
John Walker
And we certainly, but we have to recognize the confusion between volatility and risk, right. There is volatility in the market always embedded in the market.
Jason O’Meara
But this an industry or a profession, John, we don’t do a good job of doing that.
John Walker
I agree.
Jason O’Meara
We ask you what’s your risk tolerance, and we show you nothing but volatility. You know, those are two different things. My opinion is volatility is volatility. Volatility fluctuates, right? How far are your accounts going to go up or down in a given year, right? But risk is real and risk is irreversible.
John Walker
And the greatest risk, right, is this, is not having your plan be successful. It’s stagnation. It’s losing your purchasing power. It’s not being able to get the outcomes that you want because you haven’t invested or built a plan that can actually weather these things, right? And so, one of the things you can do, Jason, beyond moving away from this ethos of safe is going to help me through this is you also need to be really purposeful and intentional around how you create income, right? How do you create an income that is less impacted by this or that can help you have more stability, you know, whether it’s through guaranteed or recurring or non-market dependent? I mean, I think the biggest decision that a lot of families face is around Social Security, right? That is something that can be guaranteed and predictable and also has an inflation adjustment in it.
Jason O’Meara
Oh, that’s the best part of it, yeah, it’s not stagnant.
John Walker
And so how do you choose purposefully when to begin taking Social Security because, I mean, Jason, you and I talk to a lot of families all the time and we’ll have folks come in and say, as soon as I’m eligible, I’m taking it, or I’m going to wait till 70, the last possible day I can turn it on, the ends of the extreme spectrum, and we say, why?
Jason O’Meara
Why? Yeah, give me your thought process around it. Tell me how you came to that conclusion. It’s usually what we say, right? And usually we get one or two answers. Well, I want it to get as big as possible, so I’m going to wait as long as possible, or I want my money now. They turned into a JG Wentworth commercial, right? It’s my money. I want it now, you know, it’s really funny when you see that. But the reality of it is once you build it into a plan, like I always say, if we don’t show it to you in the plan, then we need to, right? Let me reword that. If we show it to you in the plan and it confirms your thinking, great. Not everybody should wait till 70 and not everybody should take it at 62, right? That’s why there’s a spectrum, right? We find the perfect time for your situation.
John Walker
And that’s the really important thing, right, for your situation because there’s a million articles out there and a million, your favorite, Jason, rules of thumb that are lazy and not specific to you. So what is important to understand is where does your plan need this and what role does it play? Are there spouses involved? Are there other things that we can account for, right? Because that is such a critical decision amongst a litany of other critical decisions of where your income is going to come from. And so really having a real purpose and logic behind how do I replace the paycheck I no longer have with one that’s going to actually last as long as I’m on this earth, right?
Jason O’Meara
And guaranteed income takes pressure off of your portfolio, right.
John Walker
Right. And that’s why it’s such a, I mean, we do back of the napkin simple math with families to illustrate this sometimes even outside of our obviously sophisticated planning software, and it’s looking at things like, well, if you spend $100,000 a year and you can get $50,000 to $60,000 a year from Social Security, we only need to augment you by $30,000 to $40,000 a year, right? So now your portfolio is supporting significantly less. So when you start that stream of guaranteed income, it is critically important because it means your portfolio has to do maybe a little less work.
Jason O’Meara
Well, because it just depends that if you have a million dollars portfolio, John, and all in your $100,000 example, all we need to have is $40,000. That’s a 4% withdrawal rate. That’s sustainable, whereas if we didn’t have that guaranteed income, that’s a 10% withdrawal rate, which is not sustainable.
John Walker
So it’s certainly not guaranteed guarantees, right?
Jason O’Meara
Yeah, guarantees make a ton of sense, but it’s just using them appropriately.
John Walker
Yeah. And Jason, you know, the other thing we find a lot, we said this earlier, is some of these expenses, as we said, they’re fixed, right? Don’t think of them as things I can cut out and the two biggest ones, as we said, are housing and healthcare. And so for many, many people, their home becomes their largest asset, right? But it’s also often their biggest blind spot. They watch their investments day to day and they log in and they get their statements and they’re looking at the, they’re watching the news and they’re seeing the red and the green and they’re all over it. But we miss the silent, quietly escalating costs of your property taxes, your insurance, your repairs, your energy costs.
Jason O’Meara
All things you have zero control over.
John Walker
And so they…
Jason O’Meara:
Don’t you live there; you have no control.
John Walker:
You look at it as you should, as my home is my home. It’s my place where I live. I raised my family. It has value far beyond its financial value, and we understand that. But you do have to recognize is your home hurting you financially because it’s illiquid. And it is probably something that is eroding your purchasing power because it’s certainly feeling the impact of inflation. So do you have to consider downsizing, relocating, restructuring how you live. Because that is something that is becoming one of the biggest line items on your expenses.
Jason O’Meara:
Exactly. I mean, not to continue to beat this dead horse here, but I mean, have your property taxes ever gone down?
John Walker:
Mine haven’t. Yes.
Jason O’Meara:
Mine haven’t either. So it’s these expenses, and then you’ve got to look at as you get older, are you able to maintain your house? Are you able to maintain your lawn? Are you able to do these things, or now are we incurring other expenses and now you have to pay people to do these things that you no longer can do?
John Walker:
Yeah, you know, and it’s just one of those things, you know, you have to be aware of because very little of it is in your control, right? That’s the key. And I think we find that in probably, as we said earlier, the biggest line item which is healthcare, right? That is the one that, you know, that’s not a quiet little creep. That is coming on leaps and bounds, right? And you know there are things that might be available to you in retirement, Medicare, Medicaid. They have value and benefits, but they still often leave gaps, right? They do underestimating the cost of these things, just like with your home, underestimating like, well, it’s fine. I cut the grass, I do all the repairs, and the taxes only go up, you know, 1%, 2% a year. OK. Healthcare doesn’t do that, right?
Jason O’Meara:
No, no. Healthcare can jump 6, 8, 10% in a year.
John Walker:
And you have to assume that you have to start thinking about higher premiums, higher out of pocket expenses. Unfortunately, as part of aging, you’re often faced with, you know, it’s the way things work, right? Your health care expenses likely become and your health care needs often become more significant than when you were younger, so you have greater expense because you might be seeing more doctors.
You might need long term care. And if you don’t plan for it, you are going to really, really feel the impact of it, right? Inflation will make its, you know, we talk about this when it comes to estate planning, Jason, right? And it’s a bit glib, but if you don’t have your own plan, someone has one for you, and this is sort of one of those things, right? Inflation’s going to keep going and chugging along whether you have a plan for it or not. And in the healthcare space, those decisions could be dire.
Jason O’Meara:
Yeah, exactly. And so ultimately, what do you do, right? So, we gave you 20 minutes of the problem. But here’s the solution is simple. One, have a plan, right? You need to have a financial plan and it needs to be a living, breathing plan that can be updated over time as these prices increase, we’re able to adjust the plan, right? Second, you need a strong investment plan.
So, you can’t save your way through this, right? You need to be able to have a strong, predictable, repeatable returns investment plan, right? I would say predictable, repeatable returns. And the reason being if your account’s earning 6% but inflation on average is up 3%, you’re ahead of the game. You’re backfilling what you’re taking out. Your money is growing. Your money is taking care of this for you, right? It’s protecting you from the event that expenses go up, which we just mentioned they will, right?
So, but also you wanna have a like your withdrawal plan needs to be dynamic. You know this is probably the biggest one, not just a stagnant withdrawal plan, as markets are strong and going through the roof. Maybe take out a little bit extra, right? And maybe base your repairs around that, right? OK, the market’s up. Awesome. I needed a new roof for the last 2 years. I’ve been putting it off. Why don’t we just take a little extra this year, you know. And that’s a good way to be able to prevent those big things from occurring when there’s also a market pullback, because one thing I can guarantee you is markets will go up over time, but they will also go down over time, right? There will be fluctuations. You will have downturns, right? But long term we believe the markets go up into the right over a long period of time. Otherwise, why would we be investing, right?
John Walker:
So yeah, I mean, I think Jason, the key there is, you know, it needs to be something that you truly plan for. It’s not a phase. It’s a constant, and you need to be prepared with a dynamic cash flow strategy. It can’t be stagnant. It can’t be static because one of the critical responsibilities we have as a fiduciary here is we really want to make sure that the families that we work with have their independence, have their dignity, and don’t have to have really, really difficult choices to face because they didn’t plan for the impact that this was going to have on their life, so. Think about it as something that you have to plan and design around because it’s not just making sure you have enough to retire, it’s making sure that you have enough to enjoy what retirement looks like and live the life that you thought that you should be able to live.
Jason O’Meara, CERTIFIED FINANCIAL PLANNER® and market leader here at Mercer Advisors. Thanks again for joining me, pal.
Jason O’Meara:
Of course, great topic, great conversation.
John Walker:
And so if what Jason and I discussed today has you thinking about your plan, how inflation is going to impact you, whether you’ve done enough to address this for retirement, we’re always here to help. Email me at jwalker@merceradvisors.com. That’s jwalker@merceradvisors.com. For Jason O’Meara, I’m John Walker. Thanks so much for joining us on the Your Life Your Wealth podcast. See you next time.
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