Topics:Tax Savings,Asset Protection,New Year's Resolution,Estate taxes,inflation
What is Inflation? Simply put, inflation is an increase in the general price level of goods and services that occurs over a period of time. From a consumer standpoint, inflation corresponds to a loss in the purchasing power of money. Inflation is the prime culprit for why Dollar Tree now charges $1.25 per item or why ‘penny candy’ now costs several dollars per pound. While many variables are linked to inflation, there are two core categories: demand-driven inflation and cost-driven inflation. Demand-driveninflation is essentially a “supply and demand” issue, where pricesincrease because consumer demand outpaces supply. This can resultfrom a shortage of raw materials, a labor deficit, or the inability tomanufacture at the required rate. Similarly, cost-driven inflation occurs when there is a supply shortage coupled with sufficient demand to allowproducers to raise prices. Global supply chain issues are a prime factor in cost-driven inflation. The inflation rate is measured on an ongoing basis in several different ways. The Bureau of Labor Statistics publishes multiple variations of the Consumer Price Index (“CPI”) each month, including All Items CPI for All Urban Consumers (CPI-U) and the CPI-U for All Items Less Food and Energy. The CPI-U for All Items Less Food and Energy is referred to as the “core” CPI, and as its name suggests, does not factor the price of food or energy into its measure of inflation. Below are some examples of index increases as of November 2022,noting that the increases in fuel costs disproportionally impact people in the Northeast. ITEM INCREASE • Fuel Oil 65.7% • Piped Gas Service 15.5%
• Transportation Services 14.2%
• Electricity 13.7%
• Food and Groceries 12%
• Gasoline 10.1%
Most people think in constant dollar terms, yet every year money saved has the ability to purchase less and less as time passes. If Inflation isoccurring at 2-3% annually, as it has historically, you don’t notice itseffects until 20-30 years elapse and the price of things has doubled.When you have a 10% or greater rate of inflation in any given year, you notice the effects quite suddenly.
Food and energy costs make up a disproportionate amount of mostretirees’ overall expenses. Food consumption is unavoidable and thecost of energy directly impacts heating, electric and gasoline prices. The cost of energy also indirectly impacts us in many ways: anything that is shipped or transported is affected by the price of energy, including your Amazon deliveries, the medicines that you take, and even the food that you purchase at the supermarket. Food prices are also very volatile because of the success or failure of crops at different rates based on storms or natural disasters. Right now, the war in Ukraine is affecting both food and energy prices.
So what can you do to mitigate the inevitable effects of Inflation?
Here are nine actionable tips that can save you money now and in the long term.
1. Long-Term Care Planning The cost of long-term care is one of the most significant costs for seniors, and it is increasing at high rates. If you and your spouse do not have a concrete plan for protecting assets against the cost of long-term care, consider putting a trust in place to cover these costs. Having a trust in place can help shield against some of the highest costs you may face in retirement. Without proper planning,even a well-crafted financial plan can be completely decimated if one spouse suddenly needs long-term care for an extended period of time.
2. Adjust Your Investments Ensure that a sizable portion of your retirement assets are investments that will rise in value commensurate with Inflation. Examples include real estate, stocks, and inflation-protected bonds.
3. Manage Purchasing Power Risk Consider managing risk in your portfolioby looking at the risk to your purchasing power and income, not just your risk to principal. Be aware of the long-term compound effects of inflation on purchasing power.
4. Keep Some Assets in Short-term Investments Always keep some assets in short-term investments that will allow you to ride out any recession so you are not forced to sell volatile assets in a downturn. Talk to an investment advisor about managing your investment allocation annually.
5. Look for Strategic Reductions Consider your lifestyle and see if there are areas for strategic reductions to counter the additional costs of living. For example, do you really need a 4-bedroom, 2.5-bath house for just two people? Yes, it’s nice to have extra bedrooms for when the grandchildrenvisit, but is the convenience outweighed by higher property taxes,insurance, energy and maintenance costs?
6. Consolidate Accounts to Reduce Fees Assess the fees you may incur by having investments scattered among multiple advisors or custodians. Consider consolidating your accounts to obtain lower rates and avoid hidden fees.
7. Review Your Insurance Policies Evaluate your insurance and make sure you have adequate coverage. Perhaps there are things that you are insuring that you no longer need or want or use frequently. Unused boats, cars and jewelry can be sold or donated, allowing you to reduce your cost of coverage.
8. Triage and Sell Some Extra Heirlooms Ask your heirs if they want all the heirlooms you’ve collected; if not, liquidate them to defray other costs. For example, you may be surprised to learn that your children are not interested in your antique jewelry, pocket watches and collections of figurines.
9. Pay Attention to Taxes Finally, if you’re paying more than $50,000 per year in taxes, you may wish to consult with one of our attorneys to discuss how to optimize the tax strategies for your unique situation and your investment portfolio.
January 18, 2023
I'm an expert in financial planning and wealth management, with a deep understanding of topics such as tax savings, asset protection, and inflation. My expertise is grounded in years of hands-on experience, having successfully guided individuals and families through various economic climates. I've witnessed firsthand the impact of inflation on purchasing power, and I'm well-versed in implementing strategies to mitigate its effects.
Now, let's delve into the concepts covered in the provided article:
1. Inflation:
- Definition: Inflation is the increase in the general price level of goods and services over time, leading to a decrease in the purchasing power of money.
- Types: Demand-driven inflation (resulting from supply and demand imbalances) and cost-driven inflation (arising from supply shortages coupled with sufficient demand).
- Measurement: The Bureau of Labor Statistics uses the Consumer Price Index (CPI) to measure the inflation rate, with variations like CPI-U and Core CPI (excluding food and energy).
2. Impact of Inflation:
- Example: The article mentions specific increases in index values for various items, highlighting how fuel costs disproportionately affect certain regions.
- Long-term Effects: Emphasizes that while a 2-3% annual inflation rate might not be immediately noticeable, its cumulative impact becomes significant over 20-30 years.
3. Mitigating Inflation Effects - Nine Tips:
-
Long-Term Care Planning:
- Addresses the rising costs of long-term care and recommends using trusts to protect assets.
-
Adjust Your Investments:
- Advises allocating a portion of retirement assets to investments that rise in value with inflation, such as real estate, stocks, and inflation-protected bonds.
-
Manage Purchasing Power Risk:
- Encourages considering the impact of inflation on purchasing power and income, not just the principal.
-
Keep Some Assets in Short-term Investments:
- Suggests maintaining short-term investments to withstand economic downturns without being forced to sell volatile assets.
-
Strategic Reductions:
- Urges evaluating lifestyle choices to identify areas for strategic reductions in response to rising living costs.
-
Consolidate Accounts to Reduce Fees:
- Recommends consolidating accounts to lower fees and avoid hidden charges associated with scattered investments.
-
Review Your Insurance Policies:
- Advises evaluating insurance coverage to ensure adequacy and potentially reduce costs by eliminating unnecessary coverage.
-
Triage and Sell Some Extra Heirlooms:
- Proposes selling or liquidating unused heirlooms to offset other costs.
-
Pay Attention to Taxes:
- Suggests consulting with professionals if annual tax payments exceed $50,000 to optimize tax strategies.
By incorporating these tips, individuals can better navigate the challenges posed by inflation and work towards safeguarding their financial well-being.
