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Your Financial Future: Don’t neglect inflation when developing a financial plan

By Gary Boatman for The 3 min read
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Unfortunately, most people do not have a written financial plan. People create a spending plan in their heads and hope they have enough income to support it. There are several important parts that are often neglected. One of these is having a plan for inflation.

Inflation is prices going up and eroding your purchasing power. We know most things are going to cost more in the future. During our accumulating years while we are working, hopefully we are receiving wage increases to help us keep up with inflation.

Someone who was born in 1953 might be surprised to see how much prices have increased. In that year, the national average price for a house was $16,937, a car was $2,552, a gallon of gas was 29 cents, a gallon of milk was 36 cents, a loaf of bread was 17 cents and a postage stamp was 3 cents. Compare those with today. Now, while 1952 was 66 years ago, many retirees will live for another 30 years. You must plan for inflation. While the cost of goods was very low in 1953, so was the income. The average American worker earned $1,970 per year.

Many pensions do not go up to help cover inflation. The standard default option for many pensions is 50% to a surviving spouse. We know that at the first death, one Social Security check will go away. We discussed several weeks ago about how taxes for a surviving spouse could easily go up 442%. We know living expenses do not go down much upon a first death. While having an inflation plan won’t fix all of these problems, the situation is much worse without one.

This is one of the reasons that Social Security maximization is an important subject. SS is one of the few retirement assets that have a cost of living index. If your check would be $2,400 at full retirement and had an annual cost-of-living increase of 2.8%, this is how your monthly benefit would grow. In 10 years, your monthly check would be $3,164, and in 20 years, it would be $4,169. In 30 years, your monthly check would be $5,495. These increases do not allow you to buy any more, just the same when adjusting for inflation.

Think how difficult it would be to maintain your lifestyle if you do not have rising income. Today, many retirees are dependent on 401(k) plans for much of their income. If the stock market was to correct early in retirement, they could suffer sequence of risk. This could wipe out retirement income, just the opposite of having a plan to deal with inflation. While there never is a good time to have a market correct, there is a worst time. That is just before retirement or right after starting it.

Having a written plan is the best preparation. Make sure that it deals with taxes and inflation. Both of those things could derail the best laid plan.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.

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