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When it comes to conversations about inflation, you might find yourself filled with fear and thinking the worst about your finances. But once you understand the breakdown of a dollar, it’s easy to keep up with the price changes (and even raise the value of your assets).

Understanding inflation not only brings peace of mind to your portfolio but prepares you to thrive in any economy. So when the dollar drops, your plan is oriented around income and growth (instead of fear and expenses).

In this episode, you’ll discover what inflation does to the dollar and how to design a retirement plan that thrives and survives in any economy.

Show Highlights Include:

  • How to stay calmdrop the fear of inflation when prices are rising and start raising the value of your assets (so that a Cup of Joe doesn’t get too expensive for you). (1:39)
  • How to survive any price changes with the ‘Sandwich’ analogy. (7:13)
  • Why cash can get you trapped if you don’t pay attention to inflation rates – and the easiest way to avoid ‘walking up the down escalator’ in your retirement plan right now. (12:55)
  • Why you should plan your retirement like a round of golf – and how to avoid the ‘headwind’ of inflation in a portfolio that embraces your best life. (17:23)

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 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 with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve. And before we get started on this week's episode to find out more about me or my team here at ONE Fire and Police, you can go to our website at PensionAttention.com or you can give us a call (805) 409-8150. And I want to thank each of you who are listening here today and for each of you listening every week and those of you who haven't downloaded subscribe, please do so. You can go to our website at PensionAttention.com and click the media tab and you can download the Pension Attention, or you can go to any platform where you would download a podcast, whether that's the apple podcast app on your apple phone or Google podcasts, Spotify, SoundCloud. Give us a rating, send us a comment, let us know how we're doing, we love the feedback. I'm excited for today's episode, this week's episode on Pension Attention and I'm calling it Inflategate. We might as well talk about it. Everyone's been talking about it, we're all thinking it. And I figured let's use a fun name, like the Patriots Deflategate, Let's talk about Inflategate. What does inflation actually mean? That's our question for today, and I want to go through it together with you to truly understand what inflation is and how that affects our money. [02:01.7]

Now, I'll be honest with you as I always will be. In sitting down and thinking about this topic and how to say it in a format that isn't a four-year degree in economics, something that I have, it was really hard because inflation has multiple tracks to how it can be looked at, perceived. But ultimately let's start with the beginning of what is inflation? At its core, what is inflation? So, Investopedia, it's a fun little website you can go to for really good topics around certain financial matters. And I Googled it to figure out what would they say about inflation and I'll add to this, but their definition of inflation is the following inflation is the decline of purchasing power of a given currency over time. They go on to say a quantitative estimate at the rate at which they decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. Zzzzzz…. Yeah, I had to go through that for four years. So, I want to make it a little bit simple for us. Here's how I break it down. [03:12.1]

Inflation is essentially, or the inflation rate, if you will, is the rate at which the value of the dollar or of our currency or of our income, however, you want to perceive it is falling and at the same time, the general level of other prices for goods and services is rising. And I think some of the best examples of this, are right in front of us, and many of you who heard me talk at stations before will mention this. And I usually look to the room and say, if someone who's been on for let's say, 20 years or so, what was your starting pay when you first got on? And a lot of times they can answer that question, but the reality is it is very different than the starting pay of a rookie right now, wouldn't you say? Now inflation is another way I say it sometimes is it's that intangible not seen, but we all know what's out there, fear. We all think it's going to like erode our capital and it will, if we have certain assets, which we'll talk about today. It also has the ability to be looked at. And inflation to be fair, can be viewed positively or negatively depending on the individual's viewpoint and the ultimate rate of change. Now I'd add to that, it also depends on how you're allocated, what your assets look like, both tangible and intangible, because with tangible assets, things like property or stock commodities, you may like to see inflation because that's typically raises the value of their assets. Now people holding cash, for example, on the contrary may not like inflation because it erodes the value of their cash holdings. [04:43.9]

Now, for example, if we're in cash and we have a 3% inflation rate, essentially that saying, let's say that happened over a year as an example, okay. Our inflation rose by 3% in one year, which we'll talk about that a little bit later, but the reality is that's a stark increase in 12 months, but in this example, let's go that way. Let's say a thousand dollars you had in cash and it was a 3% inflation rate. Those thousand dollars is basically now $997, that's how that works, simple math in that regard. But it's harder to understand because now all of a sudden, as our dollars decreasing other things are also increasing. So, although we had a thousand in cash and in this hypothetical now it's 997, at the same time, that same cup of Joe, you went to at your local coffee shop that was $2 a cup is now $2 and 10 cents. So, you have this inverse relationship between the two. So, you have this larger disparity that we study. And that's when we get into other bigger topics, when it comes to classifying inflation, whether it's demand, pull inflation, cost, push inflation, built in inflation. Those are other concepts that we have to work on, but it's important to know there's other types out there. But the breakdown of it all is understanding that as our dollar decreases, consequently, other things, general goods and services are also increasing. That's why people have this fear of inflation, but it doesn't need to be widespread. [06:07.2]

And ideally an optimum level of inflation is required to promote the spending to a certain extent, instead of saving thereby, you know, nurturing economic growth. Now that's a much larger topic when it comes to inflation, but the general thesis is it can be looked at neither good nor bad, but a lot of times I hear most often that inflation is bad, bad, bad. And again, I'm not here saying that it's good, especially now what's going on in our economy and our government, essentially putting a lot of money into the environment, which naturally will cause some potentially some inflationary periods. And we're kind of seeing some numbers come out from the government out from the federal reserve and understanding what they're looking at and their forecast. Frankly, I think we're seeing a little bit hotter or a little bit more inflation that we're projecting for that doesn't mean it's going to happen, but we are foreseeing that. And so, what are we going to be doing to curtail that inflation rise? Now I will say this, that we are in a low interest rate environment, which does help us stave off hyperinflation or more inflationary type periods. So that's a good thing going for us. [07:10.6]

But I want today's podcast around inflation to be the understanding of inflation net while is easy to measure the price changes of individual products over time. It's pretty easy to say, okay, that $2 cup of coffee last year was $2 and now it's $2 and 10 cents. We know that's a 5% increase or a 10-cent increase. We just can see the numbers there. And the human needs to extend much beyond that though. One or two such products, individuals need a big and diversified set of products, as well as a host of services for a living comfortable life, wouldn't you agree? Such as a cup of coffee, these include commodities like food grains, metal, fuel utilities like electricity and transportation and services like healthcare, entertainment and labor. Now inflation aims its goal, aims to measure the overall impact of price changes for a diversified set of products and services. And allows for, I think, a single value representation of the increase in the price level of goods and services in an economy over a period of time. So as a currency, in this case, the dollar loses value prices rise, and it buys fewer goods and services. Makes sense, I want to restate that, as your dollar declines and prices rise, that dollar will now buy fewer goods and services. [08:34.3]

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. [08:50.1]

And if anybody out there ever listened to an economist or doing readings, and I know I do a lot of that because I have to, and I really enjoy it, but this is why this concept is mentioned is why economist sometimes say money is avail. You heard that before? We think about prices in terms of dollars, but what we should really care about, I think is how many sandwiches, for example, we can buy with an hour of work. That's what I just described, right? As a currency, loses value or prices rise, and it buys fewer goods and services. So essentially, we should think about the prices in terms of how many sandwiches, for example, we can buy with one hour of work. That's a really great granular way to look at inflation. And this loss of purchasing power impacts the general cost of living for the common public for all of us, which ultimately leads to a deceleration, if you will, in economic growth, that's the economic growth side of things, right. [09:44.9]

So, the consensus view among I would say an economist is that the sustained inflation occurs when a nation's money supply, growth outpaces economic growth. That's the big difference there, that's the, where the rubber meets the road when the nations, our nation, U.S money supplied the amount of money we're putting out there into our world when that growth, outpaces economic growth. So, with that concept of inflation, maybe thinking if they print money and we have this inflation scare, let's say, how do we combat that? Well, our approach, the appropriate approach, right, is from monetary authority, like the central bank that takes the necessary measures, if you will, to manage the supply of money and credit to keep inflation within permissible limits, if you will, and keep the economy running smoothly. Now this is run on a lot of concepts lately around politics and decentralization. And we talked about that a few weeks ago with certain asset types like cryptocurrency. But the reality is we do have a central bank, whether we like it or not, that helps us understand what we can control of our money that we're putting out there and coming back in. [10:53.1]

So theoretically monetarism is a popular theory that explains the relation between inflation and money supply of sand economy. So, for example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver float into the Spanish and other European economies. So, since the money supply had rapidly increased the value of the money fell, contributing to rapidly rising prices. And I use that example, it's an old one, obviously, but to really have a stark comparison when it comes to a massive amount of money implemented into the economy, and that essentially has the fall of money. Now we may be thinking nowadays what we're seeing in us as a firm at ONE Capital Management here, we manage our portfolios with the idea and understanding that we have inflation protection. And we do that by allocation, by understanding how we rebalance our client's portfolios. Essentially, how we start out the design of a portfolio, making sure that we have a mix of things that are growth, oriented, income oriented, like dividends and yield, also different types of asset classes like stocks and ETFs, as well as fixed income bonds, everything from corporate bonds to high yield bonds, to municipality bonds of it's an after-tax account. We also have short term bonds to make sure that we don't get hurt by interest rate increases, because that might happen as well as we see a rising interest rate environment. Because again, we are also currently at a low interest rate environment. [12:27.5]

So, the cause of inflation, as we mentioned, or many of the things that we've discussed, right? The pudding of money, that's the biggest one right now, I think why we're hearing it so much is the amount of money that we stimulated into the economy based on COVID mainly what's that going to do to our portfolio? What's that going to do to our dollar? Now that aside for a second, the reality, the, most of the questions that I get, and I want to answer today, at least discussed today is how the portfolio, how your deferred comp plan is being managed to stave off what we now know now, listening to this for the past 10 minutes or so you now know what inflation is, right? Inflation is essentially the rate at which the value of a currency is falling and consequently, the general level of all purchases and prices for goods and services is rising. Okay. We know we have money going into the economy. We know that, the concept we haven't seen yet is if that money increase will outpace our gross domestic product or our economic growth. That's the key. And that's why when you look at forecast, you have to understand that even though we're putting money into the market, we still have growth going on in our economy. So ideally, we're managing that growth with the amount that we're putting into the economy. [13:39.2]

And we do that here at ONE Capital Management for our clients, understanding how we're reallocating your dividends, your yields that come in to your portfolio, where we're putting those. And as I mentioned before, if we do see some heavier inflation over the next 5 or 10 years in particular cash, as a item may not be where we want to be, because that will tend to just erode when it comes to inflation and it comes to the purchasing power risk in the market. You know, sometimes when I talk about cash, I talk about retirement planning is a little like walking up the down escalator. You know, the escalator is moving at the rate of inflation, in my example. And if you just stand still and do nothing with your money, you will actually move backwards, right? Farther from your goal. Now, if you climb too quickly with ultra conservative investments, you may still move backward, getting farther from retirement. So, to make any progress at all toward retirement, you need to climb faster than the rate of inflation. That's why I say it's kind of like walking up the down escalator. [14:43.7]

So, managing our portfolios and the risk of inflation because there's other risks, right? We talk about market risk, interest rate, risk, inflation risk, we just mentioned. I was talking about purchasing power risk, credit risk, there's a lot of risks out there that we as portfolio managers and all of us as investors need to be mindful of. It's not just market risk. It's not just what one company is doing, or a set of companies in a certain index is doing, it's multifaceted. So how we manage our portfolio around that is a lot to do with your specific situation. Then you hear me talk about each week, right? Everything from withdrawal rate discussions, portfolio structure, in terms of the order, the main three things you want in there have, and listen to some of those pockets, I recommend going back and listening to some of those because I want to go through some of those core features because everything else from here is really done on an individualized basis. [15:34.6]

And if you haven't met with an advisor, and if you like the concept of understanding more, more in depth about what inflation is, and if you have a fear about that or why it can work for you in certain scenarios or other things to avoid, maybe like cash, you can give us a call (805) 409-8150. You also go to our website at PensionAttention.com. You can set some time with myself, with Toby or with one of our advisors, and we'll go through where you specifically are and make sure we map out your retirement plans that we can make sure we're not walking up the down escalator in my example. And I'll end on this when it comes to inflation, and this is a golfing analogy, it's something I've used before. And it works because I think inflation can be this really heavy topic that we just don't truly understand. So, I really wanted to focus today on the core fundamental of what inflation is. We all sort of know it, we talk about it, but the reality is, is we have these two competing things going on. We have a devaluation because too much money is being put into the market. Meaning we essentially over-saturated our market potentially with money. So how do we stave off that inflation? Because inflation again is the rate at which the value of a currency, our currency, right? And consequently, again, the basic levels for goods and services is also rising in that same time period. But there's other factors that go into play to make sure that that's not a singular view. It also has to do with keeping it in check with also economic growth. We could also be seeing a lot of economic growth here in the near future as well. That helps stave off bigger and batter inflation that'll affect us, but still understanding how inflation works for your portfolio. And that general concept of it is important. But if you'd want to know more about it and really civil someone, I urge you to give us a call cause we'd love to go through it for your portfolio and how it fits in for your retirement plan. So again, (805) 409-8150. [17:23.6]

Now I want to mention this last topic, because if you've ever gone golfing before or really played any sport where you have to adjust to the climate, you'll understand this, right? So, when I was golfing, I was actually golfing recently and I brought it back up for myself as well, golfing with a buddy and both of us, we had these great drives off the first team were about 250 yards off the green give or take. And we pulled out our irons and I landed on the green about 20 yards in the hole. And my buddies, Sean also had an excellent shot, but when his ball was about halfway to the green, this like huge headwind came out of nowhere and stopped his ball in mid-flight landing right in the hazard zone. Now for any of you golfed before, you've seen that happen for where you miss time to misjudge the wind and you can just see the ball, like almost coming back towards you. Now, although Sean, my buddy, he's a much better golfer than I am. I won the hole because of that headwind. And it got me thinking, right? It reminded me a little of inflation and the situation around inflation. You know, you're investing against a headwind called inflation. It makes you work a little harder to reach the green. But with proper planning again, like why I bring this up, you can adjust your approach if you will so you don't double bogey your retirement. You don't want to have that all of a sudden happen out of nowhere and you miss time to misjudge those things. [18:40.9]

So that's why I thought today's weekly Pension Attention podcast around inflation would be timely. We're seeing it. We know it. We feel it. We see the news. We know there's a lot of money going into the economy. So, when we talk about inflation “risk”, what does it actually mean? We need to monitor and understand how our money supply increase is going to be affected negatively or positively and how that relates then to your planning as it comes to your pension. Also, your cost-of-living adjustment, as we talked about is largely around this subject as well. So, understanding how all of those play into it, and then really ultimately how we manage through those time periods. And if you haven't met with that person, give us a call (805) 409-8150. [19:25.6]

I want to thank each of you for listening today to the Pension Attention podcast. And before acting on anything discussed today, remember to speak with a financial advisor near you about your specific situation or you'd like our help again, you can call us at (805) 409-8150. You can also go to our website at PensionAttention.com. And if you haven't already go to our website again at PensionAttention.com, click on the media tab, hit, download and subscribe. You can also go to any platform where you would download a podcast, whether that's the apple app on your phone, Google podcasts, Spotify, leave us a review, leave us a comment, let us know how we're doing. The more feedback we get the better. And if you like this podcast, tell a friend, if you don't like the podcast telling enemy, but tell someone because next week I'm looking forward to it, same time each week until then stay safe. [20:14.4]

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. [20:37.4]

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