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Inflation is real and it’s here. The 5.4% rise in the Consumer Price Index over the last year is the highest in 13 years. You notice inflation’s insidious impact every time you fill up your tank or buy a cup of coffee. 

But how big a threat is inflation to your portfolio? 

Let’s pretend you have $60k today. In 20 years, that $60k would only be worth $33k! 

Inflation is devastating to your portfolio. But it doesn’t have to be. 

In this episode, I reveal how to counteract inflation. And the importance of having a retirement plan that protects you from inflation. 

LIsten to the episode now and shield your hard-earned money. 

Show Highlights Include:

  • The “Printing Phenomenon” responsible for skyrocketing inflation (3:37) 
  • The 2 root causes of our record-breaking inflation (4:36) 
  • Here’s how an average annual inflation rate of 3% over 20 years almost cuts your income in half (8:28) 
  • Why supply chain-induced inflation makes everything more expensive forever (11:33) 
  • The insidious way being scared of the market gobbles more of your money than making some bad investment decisions (14:21) 
  • Why the stock market, real estate, and crypto can “cancel out” inflation’s money-eating impact (15:36)  

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/, call us at 805-409-8150, or text track to 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are. At whatever stage in your career, you are in, in order to provide my nearly 15 years of experience working exclusively with both active and retired service members on their investment and retirement planning. My team, here at One Capital Management of fiduciary advisors are dedicated to ensuring you take control of your finances and build the life you deserve. Friends today, the challenge is no longer the access to information, but rather it's finding the right information. And more importantly, how that information applies to you, wouldn't you agree? And that's my commitment here each and every week on the Pension Attention podcasts, because after all your money matters. And before we get started to find out more about myself or my team here at One Capital Management, you can go to our website at PensionAttention.com or give us a call. You can call us at (805) 410-5454. In fact, now we have a text line set up. You can text the word track, T R A C K to that same number (805) 410-5454. And for those of you who aren't working with us right now, and you'd like some information about how we help active and retired service members on their investment and retirement planning, text that number. T R A C K, text the word track to (805) 410-5454, we’ll reach out to you and set some time to go through that like we've done with hundreds of others of first responders, both on the fire department side and the police department side. So do it today, it's too important not to. And today's subject matter in particular when I talk about today's world of the challenges of no longer the access to information being our problem, we're going to talk about inflation. [02:18.1]

I talked about it a month or two ago as it was starting to rear its ugly head in the summer. I actually called that episode, the Inflategate. I'm actually calling this Inflation Nation. Yeah, you know, I like some puns here and there keeps life exciting, I guess. But inflation is here, it's been here. In fact, one of the things that I think I hear most often when it comes to inflation is what we hear this word first and foremost and the basis of inflation to remember is too much money chasing too few of goods. When you're talking with your friends or your family and coming up on Thanksgiving here and Christmas time and all of that good stuff, we're gonna be talking about, you know, all these wonderful, fancy words of inflation and supply chain, all of that wonderful political geopolitical and financial talk that comes around small talk, but I want you to be really prepared for that. And I also want you on today's episode for those clients listening, as well as those who are currently active or retired, who aren't working with an advisor to really know how it affects your portfolio, ultimately your deferred comp plan, your drop, and any other assets, IRAs, or maybe your spousal has a 401k asset, things like that. How does that impact that? What is the threat that inflation poses to your retirement? And again, the basis of inflation is too much money chasing too few goods. [03:36.3]

The M2 money supplies you might have heard, or as us and economics have to understand is that's the supply side of the money aspect. When it comes to the central banks policies, when M2 increases, which we saw heavily over the past 18 months, we have what is mostly widely talked about as a printing money phenomenon, right. Basically, uncle Sam is pumping money into our economy. Now they do that by buying bonds. When you buy bonds, when the central bank buys bonds from corporations, municipalities, even buying back government bonds, it's putting money into the market, right. So, it's expansionary, it's basically trying to pump the market to keep liquidity in that regard. So, when you hear these contractionary or expansionary policies, that's more of an expansionary one. So, I want to go make sure we understand the root of the inflation environment here. [04:31.3]

And when you talk about inflation, you can do a lot of numbers around this end right now, as it stands here in November, December of 2021, as America's economy is reopening, we're seeing higher inflation rates and that's largely due to two main factors. One, the demand is high and we've pumped a lot of money into the economy and two supply chain issues. We talked a couple of weeks ago about some of the woes, when we're seeing supply chain, we've seen the news reports. We've seen the boats here in California, office, San Pedro, and it's happening across the board. And it's interesting because this unwelcomed surge really should prompt a lot of people to consider the threat it poses when it has to do with financial security. I'm going to talk about a few things to really note and few of you listening today that may have some of these asset classes and why it's important to really talk with your advisor about this. [05:21.6]

The 5.4% rise in the consumer price index in the last year, mark, the highest inflation in almost 13 years. Now, for those of you, who've made this reference before and definitely heard this and I've studied these time periods. And if you remember the soaring double digit inflation rates of the 1970s, you're probably more worried than maybe younger individuals who maybe haven't seen or witnessed that environment. However, if even if inflation never reaches those levels again, which I don't know that they will, we still need to consider the eroding effects it has really your nest egg over the long haul. So, one of the questions I want to pose in the onset of this podcast today is how much will your money be worth in 10 or 20 years? It's a fair question. Whether or not we have a runaway inflation hyperinflation, which by the way, personally, and right now of our opinion, we're not seeing that. Hyperinflation has different descriptors, but one of the main ones is a 50% rise in inflation within a month or within a couple of days. And it depends on how you look at that. So, I don't think it's going to be something we're going to see here relatively, but regardless of hyperinflation or any kind of surge on inflation, we do have something to consider when it comes to the question of how much money your money, your dollar today will be worth in 10 or 20 years. [06:42.1]

Now we can go through all the examples you've heard of the main two are gas prices and coffee prices. You know, when I'm at a station, I usually ask the question because I really think it's relevant for any active member when I'm there or even a retired member who happens to be at the house that day. And the question I ask is what was your salary when you started? Now, I'm namely putting that in the room for those who've been on the job for maybe 15, 20, 25 years, largely because it had a lot to do with putting it into your world about what inflation means and the reason why inflation is so hard for everyone. And I get it. And it's hard for me to sometimes I really had to study it for many, many years because it's not tangible, right. It's you can't touch feel or taste it. You know, it's not right there, but you know it because really six months ago, when you were paying that $70 at the gas pump, now you're paying $78. That's inflation! That coffee that used to cost you $3 and 50 cents is now 3 75 or four bucks. That's inflation. We don't see it because it just kind of happens and we just start noticing it here and there. So, when we talk about it, understand, and I'm very understanding of this, that inflation is really hard to actually tangibly see. [07:57.7]

So, the question I'm asking here in the stations, when it comes to your salary, but I'm going to bring it more into more of a broad question of how much will your money be worth in 10 or 20 years? Even moderate inflation can have a significant effect on your income and ultimately on your savings. The federal reserve, just for background purposes, the Federal Reserve's target inflation rate is around 2%, but the Fed has said currently it will allow inflation to rise above that mark for some time. So, let's take a look at how an average annual inflation rate of say 3% over the next 20 years would impact your finances. Now, quick reference point here at One Capital Management, we design our wealth forecasting, basically our financial plan that we call our black book for our clients, any client listening right now has received this black book, whether in virtual form or hard copy form and in there we show inflation running at two and a half percent because that's been the historical average. Now we've had higher inflation, we've had lower inflation, but the good target average of two and a half percent is sitting there. We are currently looking at doing a 3% inflation potentially for our planning because we rather err on the side of caution there going forward. Now, remember even still, if we have inflation rising for the next 5 or 10 years, and then it kind of resets as supply meets demand and things get somewhat in check, we may come back to the two and a half percent average annual historical inflation rate, but for today's purposes, I want to use a 3% over the next 20 years. [09:34.7]

So, if you needed $60,000 in retirement, now hear me out on this. Let's say you have an $8,000 a month pension, but between your lifestyle living in California is not cheap. And even for those of you who've left California, the lifestyle is important. If we have a 12 or $13,000 a month overhead, that includes mortgages, food, travel, kids, all that stuff, right, we need $5,000 a month on top of our pension. So, if we have $8,000 a month coming in, we need $5,000 a month from our deferred comp plan and drop that's when we get into the scenario, correct around a distribution rate, which you hear me talk about constantly? So, if you needed $60,000 in the first year of retirement, as an example in 20 years, that same $60,000 would we actually be $108,366 to match today's purchasing power of $60,000 and that's at 3% inflation. [10:41.1]

Let me restate that for a second. $60,000 today in 20 years would be $108,000. Inflation is real. Now another way to look at it at 3% annual inflation, that initial $60,000 would only be worth $33,000 to 20 in 20 years. Just an inverted mathematical equation there. We need to factor in inflation into any retirement plan. If you're not already doing that, you should. If you aren't with your current advisor, call us, you can call us (805) 410-5454 or text us, text the word track to get a complimentary retirement truck review meeting. We'll do that for you. Text the word track T R A C K, that same number (805) 410-5454. And we'll reach out to you because inflation needs to be involved in your retirement plan. Because frankly, we're talking about overall expenditures, but we can also expect everyday items like, you know, even travel and other expenses to continue to rise in costs. When you get a general rise because of supply chain issues as an example, companies will pass that increase onto us, the consumer. And usually for the most part, it stays. It not like all of a sudden supply meets the demand and a couple of years from now, Starbucks comes back. No, yeah, you know what? We're not going to charge you $4 anymore for that latte. We'll, we'll bring it back down to 3.75, probably not going to happen. So, you see this general rise and we need to be very considerate of that. [12:11.7]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to www.pensionattention.com to find out how we can help. [12:27.9]

Now considering the near zero interest rates of savings accounts, that's what I really want to talk about mostly. I've had a few call-ins from the podcast in particular recently, and some referrals that have come in and we've talked about their retirement plan, their deferred comp plan. We've gotten that all set up for them, but one of the things that keeps coming up is cash. And I know this subject is hard for many because a lot of times, as we, we feel as we get older, we should be more conservative, whether that's in our deferred comp plan or just keeping more cash. The general rule of thumb and as a CFP certificant, otherwise on the certified financial planning designation category, there is a, roughly three to six months is the general rule of thumb as it regards to your cash. So, if you have, in my example, a $10,000 a month overhead, and that includes everything you should have somewhere between 30 and $60,000 in cash. [13:27.4]

Now for my first responding clients, I usually defer to the lower end of that because it's not like we have business clients that have ebbs and flows in their cashflow. So somewhere between 30 and 40 or three and four months is probably pretty good place to be. Now that's the general rule of thumb. And as I said, a couple of weeks ago, the problem with rules, rules of thumb is that they don't really involve your personal circumstances. So, take that as a grain of salt. And that's where an advisor comes in to help you with that as well. Something we do and I do for our clients here at One Capital Management. But more than that, it's also your comfort level. I have some clients that are really like, you know, Brad, I hear that, but I actually just feel more comfortable having like 40 or 50, just having that buffer. That's fine. Now is the turning point where all of a sudden, we get into the comfort level, the rule of thumb, kind of having that safeguard there for cash for Uhh-Ohh moments and having too much cash. Look, ships don't sink because of the water around them ships sink because of the water that gets in them. So don't let what's happening around us, all the commotion and tumultuousness get inside you and weigh you down when it comes to the market, these all-time highs, the volatility. Basically, everything Biden is trying to spew, it all can get us down. We need to be very careful about being scared of the market or being scared of investing. And here's my point and why I'm saying that. [14:48.5]

One find counsel and an advisor that experience Sherpa, if you will, to guide you through the investing world. Human beings in nature, this is not just a psychology of finance aspect. This is a psychology of human beings in general. We don't like we don't understand, wouldn't you agree? Like take money out of it. For example, would you really want to walk in solo to a party where, you know, nobody, we don't like, we don't understand. We don't like that. It's uncomfortable. Markets, the market in general is a lot like that. We can read. We can listen. We can get empowered by a bunch of these influencers out there nowadays, which I'm not saying it's right or wrong, but you know, a lot of these guys really shouldn't be talking about this kind of stuff, but we can feel hoo rah, rah, but really not understand the market. But here's what I want to say is we actually need to start investing. [15:37.6]

The stock market in the past year is up nearly roughly 21%. Housing is up 15% Bitcoin, if you want to look at, you know, crypto has killed it 119% and inflation with those same numbers is up about 5.4%. Meanwhile, your bank account is up what 0.06%. We can't just save. We need to also invest. Well, Brad investing is far too risky. What if I lose all my money? Look, you can invest in the S&P 500 as an example, which has 500 plus companies, companies like Apple and Amazon, et cetera. If it goes to zero as an example, and I'm being really dark in this regard and kind of worst-case scenario, if the S&P 500 goes to zero, it means all of those companies would have gone bankrupt. we have bigger problems. Not investing is the real risk. If everything goes to zero, we have an American problem quite honestly, we have a world economy problem at that point. So, what can you do? Well, let's talk about it. [16:39.8]

First and foremost, find that counsel and that advisor. I can't stress that enough to help navigate you through what's going on in terms of supply chain, inflation markets, all of that stuff that's going on, but find that counsel. And in that first meeting, and what we do for our clients is we want to consider any fixed income sources that will not likely keep pace with inflation. I'm not talking about taking all of your cash to be clear and going into investments. What I'm talking about is making sure that we keep pace with the general rise that we're going to be seeing in cost of living, in consumer goods and services, it's going to rise. So, in that process, we need to consider how much interest we're earning from money in a savings account or a CD. And it's unlikely that we'll see a substantial interest rate hike in the next few years. So, we have to be prepared to continue earning little interest in those areas. So, it's important to assess your investment strategy right now, a retirement income plan, really to see if you're actually protected against inflation for the long-term our clients, we are we're prepared. [17:44.1]

Next, we want to calculate how much your nest egg is right now. As I mentioned before, it's interesting to look at that number because inflation at being not so tangible, winning to make it tangible and in our face, right. So, as we do that, we know factor inflation over the next 10, 20 and 30 years. Consider that while overall inflation rates may fall from what they are now, that might not be true for some other specific goods and services that could take a large chunk of your income, such as energy, food, or health care and long-term care costs. So, we need to calculate really what your nest egg is now. [18:20.9]

And lastly, something I want to leave with today is consider whether your current investment strategy will need to change once you retire. Now, I mentioned before that the kind of the general rule of thumb is, oh, I should get more conservative as I get older. That is not necessarily the case. Understanding your distribution rate in retirement is as important as focusing on the rate of return. I know that everyone loves talking about all my defer comp plan my portfolio did this, we killed it. The rate of return is this. But the unknown family member of this crazy family, we call returns and interest and finances is your rate of distribution, you’re spending as a percent of liquid assets. So, you may want to contemplate a strategy that continues to grow money in retirement. So, when transitory events like inflation hit, you're covered. [19:13.4]

Now foundationally a solid plan ensures that your purchasing power, those needs are always met. Something we strive for here at One Capital Management is to make sure that we forecast out 20, 30 years to make sure that we can see how things like inflation will impact our client's portfolios and how we as their advisor will be able to manage that. That's important if you don't have that advisor doing that or that portfolio, that's doing that, seek that advice. Now, some people may need to take on less investment risk once they get towards retirement or as they getting older. But however, having the right risk asset allocations for your situation really helps combat eroding effects of inflation on your nest egg over the course of your retirement and really over the course of your career. So how much will inflation impact your money? [20:10.7]

We looked at it over 10 or 20 years. You can see that $60,000 today is really only worth $33,000 in 20 years, or conversely, we'll need, if we need $60,000 today, we'll need $108,000. That same amount will be actually 108,000 to match today's dollars. That's pretty wild to think about. And that's at 3%. Some of these you can do consider your fixed income sources, meaning CDs, money markets, cash. Calculate really, as I mentioned before, how much your retirement portfolio really isn't present value dollars and really sit with that advisor to consider investment strategies that makes sense for inflationary time periods, because honestly, if you're waiting for the next “crash,” If you're waiting for that next crash to start investing, you've already missed out on some incredible gains. I know I'm not saying anything profound there, you've seen it. I mean the last crash, if you want to call it, that was on the 24th of February in 2020, right around COVID the S&P dropped around 34% Since then, the S&P has surged more than 90% since then. It's wild from trough to peak. Set an investment plan and stick to it. Find that advisor to understand how inflation will impact you going forward. [21:24.0]

I want to thank you for listening to the Pension Attention podcast this week. Before acting on anything discussed today, remember speak with a financial advisor near you about your specific situation, or again, if you'd like our help, visit us at PensionAttention.com or give us a call (805) 410-5454, or text us text the word track, T R A C K to that same number (805) 410-5454. Again, that's (805) 410-5454. We’ll reach out to you to set that time to go through your retirement track review meeting, to make sure like many of our clients who are One Capital Management, you're on the right path for your investment and overall retirement plan. And until next week stay safe. [22:07.4]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [22:31.2]

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