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Inflation Trends 101

When it comes to investing money in the stock market, there are no guarantees.

Even financial experts, who have devoted every waking hour to understanding the market, cannot promise a return on investment. If they could, they would never have to work another day in their lives. Instead, many experts look at many factors to try and anticipate what might happen, and then they invest accordingly.

Inflation is a Major Concern for Many Investors

This can be a tough reality for new investors who are trying to make a decent return on their retirement savings. Add elements like inflation to the mix and you may end up with people who don’t know what to do.

In fact, a recent report by the Society of Actuaries showed that 69 percent of pre-retirees polled cited inflation as a key concern – tied with long-term care.1

Stay Calm, Get the Facts

First thing’s first: don’t panic! People who panic are often vulnerable to bad advice and sometimes shady advisors who put their profit over yours.

➢ Here’s a smart rule to follow: learn as much as you can about your investments and the market, so when you talk to an advisor you understand how your money is being allocated.

It’s Anyone’s Guess!

If you’re keeping up with the financial news, you’re probably seeing a lot of speculation about whether or not inflation will rise. As with the stock market, there’s no guarantee when or if it will – there is just speculation based on many factors.

↳ For long-term investments, a diverse portfolio with stocks can be a good hedge against inflation. In the short-term, you may want to also consider bonds; this is because as inflation rises, you may be able to take advantage of climbing interest rates.

↳ Commodities, like gold, may also be an option for short-term investing. But, for long-term investments, their track record for performance has not been ideal. Gold has returned only 0.7 percentage point per year more than inflation over the past two hundred years2 – you can get a higher return than that with a simple savings account.

Talk to Your Advisor Regularly

The message here is that it’s important to understand the market and be sure your advisor is keeping up with current trends as well as your retirement goals. You should make sure your advisor reviews your portfolio if inflation does rise to be sure you adjust your investments to stay on target for your goals.

Remember, you can’t get a second opinion from the same advisor who gave you the first!

 

Inflation aside, it’s always a good idea to talk with your advisors at least twice yearly as you get closer to retiring. Never leave a meeting with unanswered questions or confusion – a good advisor will make sure you understand how your money is being invested, what fees you’re paying and the strategy he or she is employing in helping you plan your retirement income streams.

 

 

1https://www.soa.org/press-releases/2016/survey-examines-retirement-concerns/
2http://www.kiplinger.com/article/investing/T052-C019-S001-stocks-the-best-inflation-hedge.html

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Ask the Expert: Can I Retire Early?


Ask a PLJ Income Strategist Expert!

Question: Can I retire early? Is it possible? What do I need to do?

-Barbara from Los Angeles

Answer: Yes Barbara, there are ways that will allow you to consider early retirement, but there are some things you must consider. Retiring early means:

  1. fewer earning years
  2. less accumulated savings
  3. freedom to do more activities that could add to your living expenses – activities that you couldn’t do when you were working – such as traveling, social events, dining out, etc.

Also, the earlier you retire, the more years you’ll need your retirement savings to produce income. Depending on how early you actually retire, you may find that you’re going through those retirement accounts more quickly than you had originally intended. This could pose a problem both for your later retirement years when you need income the most.

The first thing I want you to do is to project your retirement expenses

  1. know when your retirement will likely start
  2. how long it may last, the type of retirement lifestyle you want
  3. estimate the amount of money you’ll need to make it all happen

One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire. Focus on your actual expenses today and think about whether they’ll stay the same, increase, decrease, or even disappear by the time you retire. While some expenses may disappear, like a mortgage or costs for commuting to and from work, other expenses, such as health care and insurance, may increase as you age. If travel or hobby activities are going to be part of your retirement, be sure to factor in these costs as well.

Don’t forget to take into account the potential impact of inflation.

Remember, what you spend today will not be the same from what you spend 15 years down the line, even if you purchase the same items.

A longer retirement also means inflation will have more time to eat away at your purchasing power. If inflation is 3% a year (its historical average since 1914) it will cut the purchasing power of a fixed annual income in half in roughly 23 years. Factoring inflation into the retirement equation, you’ll probably need your retirement income to increase each year just to cover the same expenses.

effect of inflation on milkSource: jemstep.com

Second, identify what sources of retirement income will be available to you to meet those needs.

When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won’t have enough income to meet your needs and goals. Closing this difference, or “gap,” is an important part of your retirement income plan. In general, if you face a shortfall, you’ll have five options:

  • save more now
  • delay retirement or work during retirement
  • try to increase the earnings on your retirement assets
  • find new sources of retirement income
  • or plan to spend less during retirement

Third, you must take longevity into consideration.

How long will you need your retirement savings to last? We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. The problem is particularly acute for women, who generally live longer than men. According to a National Vital Statistics Report, people today can expect to live more than 30 years longer than they did a century ago. To guard against the risk of outliving your savings, you’ll need to estimate your life expectancy.
[FREE Download] How To Retire Early Package!

Remember;

  • The longer you delay retirement, the longer you can build up your retirement savings.
  • Medicare generally doesn’t start until you’re 65. Does your employer provide post-retirement medical benefits? Are you eligible for the coverage if you retire early?
  • If you work part-time during retirement, you’ll be earning money and relying less on your retirement savings, leaving more of your savings to potentially grow for the future (and you may also have access to affordable health care)
  • If you’re married, and you and your spouse are both employed and nearing retirement age, think about staggering your retirements. If one spouse is earning significantly more than the other, then it usually makes sense for that spouse to continue to work in order to maximize current income and ease the financial transition into retirement.
  • If you’re going to be using the money from your IRA or retirement plan to fund your retirement, remember that in addition to income taxes, there may be penalties if you withdraw the funds prematurely. Or, there may be a limit on what you can withdraw without penalties.

Retirement is also a state of mind. Don’t underestimate the psychological issues involved in deciding when to retire. Many people welcome the opportunity to reinvent themselves. Others postpone retirement or return to some form of work so they can continue to feel connected and productive.

Important Disclosure