June 24, 2024

Inflation has continued to be a topic of conversation and concern in the US.  The quiet thief of purchasing power has remained stubbornly elevated, eroding the value of our hard-earned money at elevated rates.  Necessary expenses that rise faster than the growth in savings and investments can result in difficult choices during retirement.  We thought it an excellent time to remind clients how these risks are factored into our strategic financial planning process and what other considerations might also take on added importance.

Many of us are acutely aware of expenses that have suddenly jumped by amounts far above historical trends.  There are many examples, though we highlight car insurance as one that touches almost everyone and is a significant annual expense.  The chart below shows the car insurance component in CPI, showing that the reprieve consumers received during the low-mobility period of COVID has now been thoroughly surpassed by subsequent increases.

Our financial planning involves incorporating differing and up-to-date assumptions for how various income and expense rates may change over a planning horizon.  Assuming historical inflation rates or common increase factors for different expenses is too simplistic and can result in misleading expectations for future plans.  Our forecasts take these differences into account and then subject them to many scenarios to factor in unknowns and increase confidence in the output.

Periods of elevated stress on expenses also add importance to near-term decisions and considerations that help people better navigate the unexpected challenges that always seem to crop up.  Below are a handful of the most critical focus areas for our planning team at Lowe Wealth Advisors.

Key Principles of Strategic Financial Planning in High Inflation

1. Emergency Fund and Liquidity: Inflation often results in unexpected expenses or even income disruptions.  Maintaining a fully stocked emergency fund, preferably invested in highly liquid assets, ensures financial stability when challenging times arise.  Keeping enough liquid assets available enables you to cover unforeseen expenses without resorting to high-cost borrowing.  Similarly important is restocking the emergency fund if you need to use it.
2. Analyzing Spending Priorities: Every one of our clients has different priorities regarding their expenses.  Expenses range from regular day-to-day expenses to big ticket items like vacation, college tuition, or weddings.  In a high inflationary environment, we help our clients prioritize what matters most and find the most efficient ways to meet their goals.
3. Savings Review:  As inflation has increased, so has the rate available to savers.  That said, we still regularly review allocations for clients that include large balances in bank savings accounts that pay less than 1% per year.  We see many better alternatives to this, including those that can retain the safety and stability of a bank savings account.
4. Debt Management: Strategic debt management involves refinancing fixed-rate debt and minimizing variable-rate exposure.  Fixed-rate debt becomes advantageous over time as the currency used to pay it back becomes less valuable.
5. Customized Investment Strategies: Some investments we include in our personalized strategies for clients act as hedges against inflation.  This may involve purchasing inflation-linked bonds, investing in commodities, and more.  However, hedging strategies should be approached cautiously, considering associated costs and risks.
6. Regular Review and Adjustments: Financial planning is never a one-time exercise, especially when living in a high-inflation environment.  Regularly reviewing and adjusting your strategy based on evolving economic conditions and personal circumstances is essential.  Rebalancing portfolios, reassessing spending habits, and staying informed about inflation trends are integral to proactive financial management.

Conclusion

Navigating a high-inflation environment demands a proactive approach rooted in adaptability and personalized strategic advice.  Using the approach outlined in this piece, we help our clients strengthen their resilience against the erosive effects of inflation.  While high inflation presents challenges, it also offers opportunities for those with the right tools and mindset.  We believe these considerations have taken on greater importance as overall inflation has increased and could be poised to stay elevated for many years.

 

If you have questions about your current financial plan or are motivated to start the process now, we would be happy to assist.