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Coasting in Retirement Ep 1: Investments & Inflation Thumbnail

Coasting in Retirement Ep 1: Investments & Inflation

Josh and cohost Michelle discusses a variety of investment topics all related to inflation.

Transcript:

Good afternoon everyone and welcome to Coasting in Retirement! I am your host, Josh Null, and I’m joined by my co-host, Michelle Lee Melton. “Michelle, you look lovely as always, how are you?” Great. Well some of you listening may recognize me the various podcasts, radio shows and marketing videos I’ve done. And if you do, great, thank you for continuing to follow our efforts. But most of you will have no idea who I am and that’s OK! We’re going to get to know each other a lot better on this journey of knowledge and education. So let’s start our journey and dive into our topic of the day! 

This week we are going to discuss a variety of investment topics, but they’re all going to be at least somewhat related to an issue on the top of mind of just about every investor or consumer, particularly those folks about to enter retirement or already retired: inflation. Let’s start by defining inflation:

We’re going to use Wikipedia’s definition to describe inflation, and I quote: inflation is a general increase in the prices of goods and services in an economy. When general price levels rise, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. 

Got it? OK. Let’s focus on the first part of this description, “a general increase in the price of goods and services in an economy”. Most people, particularly producers, understand that a certain amount of inflation is desired, that way producers are able to receive more compensation for any goods they produce or services they offer. This often translates to salaries and incomes as well, for example, those of you listening would not want to be making the same income in 2022 that you were making in 1982 for the same job. Or even 1992. A certain amount inflation can act as a tug on the productivity of an economy, allowing for steady profit margins as the years go on.

Now let’s focus on the second part of this definition: “inflation results in a reduction in the purchasing power of money”. So where inflation can be a good thing for producers of goods and services, it can be a detriment to the consumers of said goods and services. And remember – we haven’t even talked about our recent sky high inflation and how that puts added pressure on consumers, particularly those in or near retirement. We don’t have time to discuss every single purchasing decision in retirement that’s influenced by inflation, so let’s limit our discussion to the 4 things that dominate most retiree’s expenses: housing, transportation, food, and healthcare.

These 4 categories are important to note because these are specific areas that impact those in the decumulation phase vs accumulation phase: So what’s been happening in each of these four core categories? 

Housing, until the recent jump in mortgage rates, was a story of rapidly increasing home prices. Transportation, particularly gas prices, resulted in inflation affecting both the prices of buying a vehicle as well as maintaining that vehicle. I think it goes without saying that we’ve all seen our food and grocery bills increase, coupled with demand outstripping supply in certain areas. A busted up supply chain certainly hasn’t helped. Lastly, healthcare, which I would argue is right up there with inflation as a major concern for those near or in retirement. Many folks worry about how to pay for an extended healthcare event, such as long term care.  

So what’s the natural result of all these pressures? A company called Qualtrics conducted a poll of people who are planning to retire in the next five years, what we here call the “Retirement Red Zone”, and the result is that inflation is the biggest concern for these pre-retirees. Also according to a poll, one third of the respondents say the pandemic has convinced them that they’ll need a larger nest egg for retirement, and 36 percent say the pandemic has lowered their anticipated standard of living in retirement. 

So what does all of this mean? MarketWatch says nobody suffers more from high inflation than retirees, and I agree. Back in the 1970s, when I was just a little boy, retirees living on a fixed income were hit the hardest as prices continued to skyrocket. For several years retirees lost purchasing power. And right now, inflation is the highest we’ve seen in nearly 40 years. Many retirees and pre-retirees remember what it was like in the late 70’s and early 80’s. And they don’t want to go back there. Well, maybe they want to feel physically like they did 40 plus years ago, but they don’t want inflation to radically change the retirement they’ve dreamed about. 

Folks, the reality is, inflation never sleeps. It never stops. It might ramp up or it could slow down, but it never goes away. If you want to maintain your current standard of living in retirement, you have to understand what rising inflation can do to your retirement, and how you can help protect your savings. Fortunately, we can help at Gulf Coast Financial Advisors. One of the services offer is an income analysis, what I sometimes to refer to as an income solve, and we use it as a key part of our comprehensive financial planning services. Here’s how it works:  

  • First we figure out how much you’ll need for the retirement you’ve been dreaming about
  • Next we uncover the main risks posing a threat to your retirement, including inflation, stock market volatility, potential tax increases, skyrocketing health care costs, etc
  • Then we discuss options for generating income in retirement and putting your investment portfolio to work doing specific jobs, such as battling inflation
  • Finally we discuss how to keep your current standard of living in retirement, even as costs keep rising. 

For listeners of the show that reach out to us, we’ll provide this income analysis at no cost and no obligation. You can give us a call at 251-333-5151 to set up an appointment, or find our contact info on our website, gulfcoastfa.com.  

This isn’t my first rodeo, so I’ll say this to our listeners: you might have a good handle on your budget today. But the cost of everything typically doubles about every 20 years. That means in 20 years, you’ll be spending twice as much to have the same lifestyle you currently have. As your savings are used over the course of your retirement, your cost of living will keep going up. But putting a plan in place is the first step to making sure your savings will last no matter what happens with inflation, taxes, long term care, potential volatility, etc. So again, reach out us at 251-333-5151 to start the conversation and hopefully gain some peace of mine!  

Alright, so we’ve discussed the definition of inflation, the main areas of concern related to inflation for those in or near retirement, and the ways we can help you address these concerns. Let’s pivot to another potential challenge to living the retirement lifestyle you’ve always dreamed about: longevity risk. 

Anyone that knows me well knows I like to joke that I’m going to live for a long, long time. Most of us will underestimate our life span by five years or more. I say it somewhat in jest, but I do come from a line of long living men, so Lord willing, I’ve got a shot at many years in retirement. However, many folks take the opposite approach. Even though the average life span has increased dramatically over the past 100 years, we still underestimate how long we’ll spend in retirement. In fact, Two out of three men and half of women underestimate how long they’ll live past age 65. Might not seem like a huge deal if you can’t get a trivia question right on life expectancy, but this can mean a big problem when you start to factor in the dollars and the affect of inflation on longevity.  

Longevity risk for retirees is most felt when folks “outlive their money”. Running out of money is still the number one fear for baby boomers, and for good reason. Projections show that among pre-retirees, 40 percent of households will run short of money in retirement. Think about it this way: if you end up living a long time in retirement, say 20, 30 or even 40 years plus for some of you, what is likely to happen with inflation over that time? We’ll, hopefully and probably it won’t keep increasing at it’s current rate, but it will increase, and it will have to be accounted for in your financial plan and income analysis.  

Some of the key questions we work to answer as part of our process are how can we create an inflation-adjusted spending plan for retirement, how much a client needs to save to have the same lifestyle in retirement, and actions we can take to address the possibility of inflation impacting our client’s income later in retirement. 

This is most certainly a common fear for most of the people I work with - they want to know if they’ve saved enough. Everyone gets caught up in how much they’ve saved. But what you really need to think about is how much you’ll need to spend in retirement. How much income that bucket of produces? What could it take for you to live your ideal lifestyle for the next 30 years… or longer? Even if you think you already have an income strategy, I invite you us a call at 251-333-5151 so we can help you. Remember, our process is not overly complex: 

  • First we figure out how much you’ll need for the retirement you’ve been dreaming about
  • Next we uncover the main risks posing a threat to your retirement, including inflation, stock market volatility, potential tax increases, skyrocketing health care costs, etc
  • Then we discuss options for generating income in retirement and putting your investment portfolio to work doing specific jobs, such as battling inflation
  • Finally we discuss how to keep your current standard of living in retirement, even as costs keep rising. 

The strategies we use are designed in part to help you with inflation and longevity risks. We aren’t doing this to make you rich. We want to help make sure you don’t end up outliving your retirement savings. Again, that number to call is 251-333-5151, or find us at gulfcoastfa.com. That’s gulfcoastfa.com. 

Alright, coming up next - There’s always a lot going on in the world! Particularly the world of finance. It seems like there’s major headlines every week affecting investors, especially those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!

Segment 2 - Michelle with the News of the Week:

Josh: “Welcome back! As we discussed before the break, it seems like there’s major headlines every week affecting investors, especially those in or near retirement. Michelle and I are going to help you all understand and decipher the deeper meaning of those headlines, particularly the ones that relate to our show topic and have an impact on those in or near retirement. So with out further adieu, here’s “Michelle with the news of the week”!:

1. Michelle: Alright Josh, let’s start with Bloomberg News. According to Bloomberg, “Inflation Forces Over Half of Americans to Consider Second Jobs. The article states that Over half of working Americans have considered holding multiple jobs to pay their living expenses as inflation remained stubbornly high in September and real wages fell.”  

(https://www.bloomberg.com/news/articles/2022-10-19/inflation-forces-over-50-of-americans-to-consider-a-side-hustle) 

Josh: Sadly this is not surprising. And there’s nothing wrong with a side hustle, Michelle, both you and I are very familiar with side hustle, we’ve both done all kinds of jobs in the past to keep our main careers moving forward. Here’s why this tidbit matters to our audience: if you’re in or near retirement, that last thing you probably want to do is either go back to work, or feel forced to take a part time job, what is now often called a side hustle. The way you avoid that is to have a financial plan, accumulate assets and live within your means in retirement, but what happens when inflation changes the rules of the game? You have to have an income solve, and that involves having money with different purposes. The most important thing is not the pile of money you have in retirement but that amount of income those assets can produce. Michelle, how would you feel about having to get a job in retirement to afford increased prices on everything? That’s why it’s so important to include inflation calculations and strategies in your financial plan. Alright, what’s next? 

2. Michelle: Forbes had a recent article titled “How Inflation Affects Your Retirement Plans”. One thing mentioned in the article stuck out to me: “Expenses may rise at a faster rate than fixed income. This creates the need to either reduce spending or withdraw more money from investments during a bear market.” Josh, can you explain that more?

(https://www.forbes.com/sites/chriscarosa/2022/07/18/determining-how-todays-inflation-impacts-your-retirement-ongoing-needs-tomorrow/?sh=4ee51c3540b5)

Josh: Ok, this is and import topic and hugely important to retirees. Lets first talk about what we mean when we say fixed income. The most obvious examples of fixed income are social security and pensions. But you have also have annuities and investment portfolios comprised of government & corporate bonds, maybe some CD’s or money market funds. Most of these types of fixed income are meant to provide steady eddy income flows without a huge amount of stock market exposure. The downside to this is typically fixed income does not keep up with high inflation, which means retirees feel pressured to dip into their savings or investment accounts to maintain their lifestyle. This can even result in a phenomenon called the “draw-down risk” that we’ll discuss at another time. One way or the other inflation is a definitely an enemy to fixed income and has to be accounted for as part of a comprehensive financial plan, a service we offer at Gulf Coast Financial Advisors. What’s next? 

3. Michelle: Headline from CNN Business: “Everything is expensive: Seniors cut back on socializing and meals as inflation pinches”. This article makes me sad because I don’t ever want to cut down on socializing! (Laughs). 

(https://www.cnn.com/2022/10/25/economy/inflation-impact-on-seniors)

Josh: OK, I’ve got one main takeaway from this: most people plan on spending less in retirement, and while that’s generally true, it’s also true that people rarely adjust their overall lifestyle just because they retire. They still eat at the same restaurants, attend the same events, travel to the same destinations, buy the same clothes, drive the same cars, etc. And that’s ok, that’s what you want – to have more time to enjoy the things that make you happy. But when you don’t have a financial plan that has specific jobs for your different assets and investments, high inflation can throw a monkey wrench into your day to day enjoyment and cause undue stress. While there’s no such thing as the perfect financial plan, having a comprehensive plan in place typically increases your chances of not having to make unwanted sacrifices in retirement. What’s next?

4. Michelle: Josh, are you familiar with Charles Schwab? Josh: Yes, of course, they are one of the trusted custodians we use! Michelle: Well an article on their website asks, “How Should Retirees Respond to Inflation?”. This article breaks down how the stocks, bonds and cash compare against inflation over the long run, with stocks performing the best when compared to inflation. 

(https://www.schwab.com/learn/story/how-should-retirees-respond-to-inflation)

Josh: Yes Michelle, this article makes a couple of important points. Not that you want to have all of your investments in stocks or mutual funds or exchange traded funds when you retire, but as we discussed earlier, you need to be comfortable with different sections of your investment portfolio having different jobs. And the job of the equities portion of your asset allocation is to hopefully have enough capital gains and appreciation to outrun inflation. We then couple this with other strategies intended to preserve capital, or produce income, or whatever is needed to accomplish the financial goals of our client. 

5. Michelle: This one comes straight from Social Security website, ssa.gov: “Social Security Benefits Increase in 2023”. Per the article, approximately 70 million Americans will see a 8.7% increase in their Social Security benefits and Supplemental Security Income (SSI) payments in 2023. On average, Social Security benefits will increase by more than $140 per month starting in January.

(https://blog.ssa.gov/social-security-benefits-increase-in-2023/#:~:text=On%20average%2C%20Social%20Security%20benefits,higher%20cost%2Dof%2Dliving)

Josh: So this was a no-brainer for the social security administrative office. Federal benefit rates increase when the cost-of-living rises, as measured by the Department of Labor’s Consumer Price Index (CPI-W). The CPI-W rises when inflation increases, leading to a higher cost-of-living. This change means prices for goods and services, on average, are higher. The cost-of-living adjustment (COLA) helps to offset these costs. So this is one of those rare instances where you can squint at this headline and say that inflation actually helped retirees…as long as the Fed is able to get inflation tamed over the next handle of months. Great find Michelle. 

Josh: Michelle, great job with the headlines, these are all important pieces of information that impacts those in or near retirement. And for our listeners that are impacted by this news of the week, we invite you to take action and start a conversation about your financial plan. You can reach us at 251-333-5151 or find us at gulfcoastfa.com. 

Segment 3: Where Josh nailed it, where Josh was a little off: 

Welcome back! So the point of Coasting in Retirement is to offer guidance to those in or near retirement, which means we often have to give our professional opinion. And while I am proud of thought, care and due diligence I put into giving my professional opinion, I’m also human, which means I don’t always stick the landing perfectly. So each week I get to poke a little fun at myself by admitting to any thoughts or opinions I’ve put out there that weren’t 100% on point. BUT this segment has to be fair, Michelle! So I also get to pointing to some of my thoughts and opinions that were pretty accurate. We call this segment “Where Josh nailed it, and where Josh was a little off”. Alright Michelle, be gentle. What’s first?

1. Michelle: well, let’s start with the topic of the day – Inflation - will it continue or will it taper off? Josh, did you nail it or were you a little off?                                                                                               

Josh: Oh man. Starting off swinging, are you? My biggest miss a few months ago was inflation. On one of my Every Dollar Counts podcast episodes from this past summer, I laid out that how inflation is a measure of the rate of change in prices, not necessarily a measure of the change, and how that simple mathematically fact almost forces the inflation rate to ease. Now to be fair, I made my prediction before the Russian invasion of Ukraine had caused much global disruption, plus I could not have foreseen the shock effect on gas prices, and quite honestly, what I think is even more disruption in the global supply chain that gets discussed. And demand and the labor market participation rate have not eased, adding even more pressure to inflation. All of us have seen the empty spots on shelves in our favorite grocery stores of goods that we need to buy, that my friend is demand outstripping supply in a damaged supply chain. And when demand out strips supply, prices rise, and when prices continue to rise, you have inflation. This matters to pre-retirees and retirees because they need to address their income stream. 

 2. Michelle: Housing demand. Nail it or little off?  

Josh: Nailed it, unfortunately for some. I was interviewed a handful of months ago about where I thought housing prices were going, and I was way more realistic in my opinion about housing than I was about inflation. But the reality is that people tend to buy the house payment they can afford, even backtracking into the total house price, and when mortgage rates where artificially low, combined with a lack of housing supply, what you had was a little mini bubble of offers over asking and multi offers. It wasn’t going to last, folks. Now, the growing markets, like our part of the Gulf Coast, will recover over time, but a lot of people that were counting on a rising home value to either pay some bills or flip for a profit are going to be left sitting with a chair to sit musical chairs, and that has a domino effect on both housing demand and housing prices. This matters to pre-retirees and retirees because now is probably not the best time to list your house or search for a new house. If you can, let this downward pressure on house prices play out and see if there are deals to be had. 

 3. Michelle: Continuously rising stock market. Nailed it or a little off?  

Josh – nailed it, again unfortunately. There are a handful of stock market indexes to mention, such as the Nasdaq and S&P 500, but let’s just concentrate on the Dow Jones Industrial Average for this discussion. The most recent all-time-high record was on Jan. 4, 2022, when it closed at 36,799.65. Between November 2020 and July 2021, the Dow rose more than 5,000 points. On Nov. 24, 2020, it broke 30,000 for the first time, closing at 30,046.24. Until October’s rally the Dow had fallen 20% since it’s January high. So here’s the thing. Just because I’ve personally gone through a handful of stock market corrections doesn’t make me some soothsayer, otherwise I would have been like the guys from The Big Short movie and shorted a bunch of financial positions. And I’m a fairly optimistic person by nature. But common sense and a basic understanding of the stock market told any of us really paying attention that the market was overvalued in some areas. And I think it’s fair to say that a big part of this was all of the money dumped into the US economy by our federal government. Some of the correction was a natural economic event of getting valuations back in line with reality, but I think a big chunk of it was simply the “burn off” of all of that excess capital. I mean, ughh, don’t get me started on the meme stock guys! Anyway, the main take away is this: invest for the long term in the stock market, even if you’re in or near retirement. Just have other investment allocations for your capital preservation and income production. We can help with that. What’s next? 

4. Michelle: Investors should shift to cash or bonds to avoid market volatility. Nailed it or a little off?

Josh: Nailed it. We actually touched on this on one of your News of the Week headlines. Bonds typically don’t strongly outpace inflation, and cash almost always fall behind except in rare cases of stagflation. Retirees need to be comfortable with having some equity exposure because that is historically the best way to combat inflation. 

Here’s Bad Advice given related to this topic: “Shift to Bond-Based Funds as You Approach Retirement” Investors have long been taught to shift toward bond funds as they approach retirement, says John Stoj, founder of Verbatim Financial. “This idea once made both intuitive and practical sense. Bonds generate income in the form of interest payments and are more stable than stocks,”. The issue comes down to how investing for retirement works: There’s an accumulation phase and a distribution phase. “Accumulation occurs when people are working, actively saving and investing. Distribution occurs when people retire and stop earning income from a job,” says Stoj. The problem with the rubber-stamp advice instructing you to invest in stocks during the accumulation phase and shift to bonds as you approach the distribution phase is that it leaves you exposed to inflation risk—especially in the current low interest rate environment. If your bond portfolio is yielding less than the rate prices go up, you can end up running out of money much sooner than you planned. It’s important to have some bonds in your portfolio because they can minimize stock market volatility—but totally avoiding short-term stock market stops and starts comes at the cost of much less protection against inflation. You’ve also got to keep an eye on longevity risk, or the possibility of running out of retirement funds too soon. Keeping money in stocks gives you insurance against this risk. 

Better Advice: Invest for the Long Term, Even in Retirement. The goal of a retirement portfolio is for the money to outlast the retiree, so sticking to an out-of-date rule of thumb could deprive you of the lifetime income you need. “Advisors need to show good reasons for their recommendations,” says Stoj. Ideally, your advisor will help you see how a shift to bonds could affect your portfolio under a number of scenarios so you can make the best choices for your retirement needs. Keeping some money in riskier investments like stocks, even as you approach retirement, can help you avoid the low-yield trap of an all-bond portfolio. No matter what asset allocation your advisor suggests, make sure the advice is based on your specific portfolio and income needs. That requires a deep dive into your financial plan so you can determine how to create a portfolio that will go the distance. “This is often the most complex part of financial planning,” says Stoj. It may be easier to fall back onto rules of thumb, but that doesn’t necessarily create a portfolio that can weather volatility at the wrong time.

5. Michelle: Most investors were prepared for the amount of volatility we’ve experienced the last couple of years. Nailed it or a little off?  

Josh: I’ll respond to your statement first, then answer to your question – were most investors prepared for the amount of volatility we’ve experienced the last couple of years? I would say no, actually. Of course that depends on if they were long term investors, their risk tolerance, their time horizon, etc. I think for our individual practice, we mostly nailed this because we’ve been pretty consistent about having the conversation with clients regarding volatility. That said, I think both our practice and especially the industry at large was not prepared for the historical levels of volatility the market has experienced ever since the Covid drop in March of 2020. No one was! I believe the entire financial services industry was a little off because we had been on such a long, smooth uphill climb. One way I personally have learned and adapted is by being more consistent about introducing products that help level out volatility, including insurance products that are designed for capital preservation with some upside potential.   

6. Michelle: The investor client to advisor relationship has shifted permanently to an online relationship. Nailed it or a little off? 

Josh: Alright, this one hurts a little. Maybe a lot.  

Segment 4: Mailbag and Show Close 

Welcome back! Great show today Michelle! We’ve got some time left so why don’t we check in the mailbag and see if there are any questions needing answered. 

Michelle: Alright Josh, here’s one from Paige in Fairhope: “How much money do I need in retirement?”.

Josh: So, great question Paige. Now don’t get mad when I sound like a politician and tell you “it depends”. The main thing it depends on is what your lifestyle costs. As we stated previously in this episode, people tend to not dramatically reduce their lifestyle in retirement. So you need to take that into account. You also need to take into account that the old “4%” draw down rate has been shown to often not be enough. Explain that, importance of the income produced from that bucket of money, using payout rates of IA, etc.