Let’s face it – the subject of economics is not on most people’s “top ten” list of favorite things to read about. And the area of the economics field I am writing about today – inflation and why you should think about it during mid- life career transition or retirement planning – may seem even less appealing.
In addition to discussing a pretty dry subject, today’s article covers an aspect of economics which is not necessarily pleasant, especially for those of us who might remember the soaring price increases of the 1970s. In fact, former President Reagan, who presided during a time of relatively high inflation, was known to have said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Dismal Science or Useful Facts?
You might have also heard the famous comment by the 19th Century historian Thomas Carlyle who called economics the ”dismal science”. Inflation is probably one of those subjects that explains why Mr. Carlyle tagged the field in this way, even though the nature of inflation was probably not well understood during those times.
However, I think there are practical ways to address this subject so that you don’t have hit the snooze button or take an anti-anxiety pill. Without sounding like a typical financial advisor (a goal I actually aspire to attain!), we do need to give some thought to the phenomena of inflation when thinking about a mid-life job change or even retirement down the road.
That is because over a long time frame, inflation will have some negative effect on your personal finances. The money you have set aside to pay for your living expenses will not go as far. Put another way, tomorrow’s higher prices means your money will purchase fewer goods and services many years in the future.
Is Inflation in Permanent Hibernation?
But wait, is there not good news here? Hasn’t the rate of inflation been relatively tame since the challenging decades of the 1970s and 1980s? There is certainly truth to the observation that inflation has been far less problematic over the past 30 years, and especially over the past decade.
For example, inflation averaged 7.25% from 1970 to 1979 and 5.82% from 1980 to 1989. Ouch! However, price growth eased substantially after those decades to 3.08%, 2.54% and 1.80% over the following three ten year periods (according to data from inflation.com).
This is undoubtedly good news for all of us these days, compared to the situation decades ago. That is one reason I do not think we have to feel overly fearful about inflation. But today’s “modern” world still requires us consider it in our planning, especially as we approach our mid life years (50s and older).
For many reasons, it would be very unwise to be complacent about this risk. Inflation can come and go and the trend from the past three decades may reverse. Even if this does not occur, today’s long-life expectancies require us to consider the likelihood that our money will need to last much longer than may have been necessary for previous generations. I recently wrote an about the importance of planning for a long lifetime as a strategy to reduce the risk of your not running out of money during your lifetime.
Although today’s inflation rates are very modest compared to history, they will nonetheless have a negative impact on our long-term finances, especially for those who will be in retirement for 25 years or longer. As I wrote in my recent blog, it might likely be very prudent to assume a very extended time horizon, even if you are unsure you will, in fact, live a long life. You do not want your money to run out before you do!
The Connection Between Inflation and Your Health
Adding to the magnitude of the inflation problem are healthcare costs which have become extremely expensive for almost all Americans. These expenses have a “double whammy” for people who are in mid-life.
First, healthcare premiums and expenses are subject to a much higher inflation rate than the price increases seen in the general economy. While today’s inflation rate has struggled to consistently approach a very reasonable 2% over the past decade, healthcare inflation is averaging 6% during that time frame.
Second, while these costs continue to escalate at a high rate, medical expenses begin to consume a much higher percentage of household spending as we age. In other words, you may likely spend more for healthcare, not solely because of inflation. Healthcare will also cost you more for the simple reason that you may likely use more of these services as you age.
According to the JP Morgan Guide to Retirement, healthcare costs for today’s average 65 year old are projected to more than triple over 30 years in today’s dollars for three reasons: 1) higher than average inflation for health care expenses; 2) increased use of health care at older ages; and 3) Medigap and Medicare premiums that increase not only with inflation but also due to increased age.
The implications of this research is that mid-life professionals and senior citizens may likely experience a greater rate of inflation than other Americans. Like most aspects of personal finances, we do not need to fear this data but instead use it to determine how it may impact your own finances and develop strategies which offer good potential to reduce the impact of this challenge.
The Tools To Fight Inflation
That is why I advocate a methodology called “cash flow based financial planning”. This kind of contemporary financial planning approach can estimate (among many other details of your personal financial cash flows) your future medical premiums and out-of-pocket healthcare costs and the associated higher rate of inflation for these expenses.
I have written about these modern financial planning methods in a previous blog, but the idea is to prepare for a confident financial future by preparing a rigorously detailed projection of your finances over the short, intermediate and long term time frames.
This modern approach allows you and a professional advisor to visualize your financial future and better evaluate inflation and other risks. This may help in developing the appropriate strategies that have excellent potential to sidestep a number of pitfalls that may detail your finances, including inflation and the likely inevitable growth in healthcare spending that you may experience.
I will be writing more about those inflation fighting strategies in another article very soon. For brevity, these techniques include a range of options such as optimizing your Social Security elections, funding tax-advantaged healthcare accounts before you leave the workforce, and even investing a portion of your savings in sectors of the financial markets that have demonstrated potential to grow as fast or even faster than the inflation rate over the long-term.
I completely understand why the historian Thomas Carlyle and many of you think economics is a dull and perhaps anxiety provoking subject. But the forward-thinking planning methodologies I advocate may offer long-term financial benefits and peace of mind. Not only may you avoid spending time on a dull subject down the road, you may also avoid the unpleasant financial surprises and anxiety later in life.
As always, I welcome your comments and questions.
