If anyone has been paying attention to the news recently they have noticed that inflation has been an increasing topic of concern. Everyone from Reuters to CNBC to NPR have been talking about the increase in prices. While news articles are sometimes designed to scare us (and should be ignored), it is also important to notice that data from the Bureau of Labor Statics supports the fact that prices are rising. While the information and news may be scary, there are several important things to consider when investors think about inflation and the effect that it may have on their financial goals.
Inflation is sometimes thought of as the change in prices of a specific good over a time. For instance if a product costs $1.00 today and $1.05 in one year then we would view that as inflation. Specifically the rate of inflation for that specific good was 5%. In other words, as inflation rises my money can purchase fewer and fewer goods. This can be a concern, but how big of a concern should it be to various investors?
It’s also important to realize that the impact that inflation has had on retirement has varied dramatically over the years. Imagine if you had retired in 1970 and lived for 25 years. A basket of goods that would have cost $400 in 1970 would cost $1,571.13 25 years later. That is an inflation rate of 292.8%. However, if a person had retired in 1990 and lived 25 years that same $400 would only have increased in price to only $725.38. In comparison that is an inflation rate of only 81.3% over the 25 years.
The reality is that inflation should be approached by investors differently. Different approaches should be taken by investors who are far from retirement vs investors who have recently retired and are wondering how to make their dollars last for the next 25 years. Even within a cohort of recent retirees you will find different approaches are appropriate based on how well funded their retirement goals are. Even making distinctions between whether an investor is a home-owner or a renter can make a difference in how they think about inflation (this is especially true for retired investors).
The reality is that some investments have historically provided great hedges against inflation for investors looking to build their portfolio while other hedges against inflation are more appropriate for investors who are looking for income from their portfolio. It would be silly to suggest that there is one optimal solution for all investors when it comes to inflation. Instead, speaking to a financial professional who understands their unique circumstances can allow an investor to find the optimal solution for their unique circumstances.