Retirement Planning with Rising Rates and Inflation

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Retirement planning was much easier during working years than the challenge of managing after retirement. During the working years it’s relatively simple: just keep stashing money into your retirement plan and let the markets, over decades, do the rest!

While many people continue to work during the so-called retirement years, many others can’t – or would rather not – work.  They’d rather enjoy other pursuits.  The problem during ‘retirement’ is much more complicated, though.  It’s not about simply stashing money anymore. 

Now, there’s a new problem: how to be a actuary!  Now, you have to face the challenges pension managers face: how to fund your own ‘pension’ liability for an indeterminant period of unpredictable changes in inflation, interest rates, and tax legislation.   Not easy.

How do you do that?  A look back might be of help.  Those who retired during the early-to-mid 1970s were doing so at a time when interest rates were heading higher, as was inflation, while the markets were stagnant.  Not a bad model to review, whether or not the markets repeat. 

It was a time when many new retirees began to experience interest rates and inflation that grew in tandem up to double digits, about 15-17%.  They loved the fact they were getting ‘pay raises’ by simply rolling 6-month CDs!  Few considered  that after taxes, they were actually losing purchasing power, but that wasn’t what undid many of their retirement plans.

No, it was the problem created when they began rolling CDs as interest rates and inflation both trended down.  Let’s look at a simplified hypothetical example of the kind of situation that was common during that double-digit period:

Fred and Mary are retired.  Inflation is 15% and their 6-month CD is paying 16% – no not an exaggeration – and they’re happy.  Never mind that even in a 25% tax bracket, they’re really earning only 12% and losing 3% to inflation.

The next year, inflation and interest rates start down.  Suppose inflation drops to 12% and, when they go to roll their CD, the new rate is now 13%.  That 3-point drop in interest puts them in an uncomfortable situation.   When they go to the grocery store, prices are still 12% higher, but their income has dropped 19% (3 points off 16% to 13% is 3/16 = 19%).

Yup, the next year, even with another drop, prices are still higher and their income dropped again.  Not good.  Too bad their assets weren’t arranged to preserve value. 

Mark Twain once said, “History doesn’t repeat; but it rhymes.”  Cycles happen and stuff happens.  Planning isn’t about what we know; it’s about what we don’t know.  And, often, the arrangement of assets can be more important than being clairvoyant.

Guardrails can help! You might enjoy our webinar on how to install them into your plan! You can register here.

Enjoy!

Jim

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Jim's picture
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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