Inflation is killing us. Let’s talk about it.
First, let’s discuss inflation and how serious it is. We need to be rock solid in our belief that inflation is one of the worst financial phenomena we will face.
Second, we’ll chat about what we collectively can do to kill it.
Third, will discuss what you individually can do to prevail against it.
Inflation is Your Mortal Enemy
Inflation is trendy now. But I’ve been talking about it for years.
In episode 2, published on January 11th of 2021, I asserted publically that our principal problem was inflation. What was inflation for the prior year, 2020? 1.23%. We were coming off a decade of inflation under 2% per year. And yet I was still warning about it. And many of my clients can assets that I was speaking to them about it years before that.
As legendary financial advisor Nick Murray put it, “inflation is your mortal enemy.” It is the destroyer of your long-term purchasing power, and thus of your long-term savings.
And that was before the Covid Pandemic and the trillions of dollars in subsequent stimulus. I was warning people in the summer of 2020 that the government cannot just print trillions of dollars in money without that chicken coming home to roost. Eventually, we would see high inflation to make up for it.
Milton Friedman said it best. “Inflation is just like alcoholism. In both cases, when you start drinking, or when you start printing too much money, the good effects come first. The bad effects only come later.”
The stimulus money was nice when it was coming in. I enjoyed it. It helped many families. But now we are going to pay for it.
But it isn’t just the rampant inflation we’re experiencing now. General inflation is toxic. And while much of the discussion these days is focused on the short-term inflation and this current temporary market decline, the much bigger problem is the long-term effects of inflation. We must keep both the current inflation and market headlines in perspective.
Here’s how I discuss it in the book, 3D Retirement Income.
Inflation’s Impact on Retirement Income
Is your retirement principal “safe” if you run out of money?
Is your retirement plan revolving around avoiding market losses “successful” if you lose your money to the rising cost of living?
Calling your retirement portfolio “safe” simply because you won’t “lose” money in a market crash is like calling a morbidly obese person “healthy” simply because they don’t currently have the flu.
Your lack of problems in the short term does not ensure your long-term success.
Even if you have no short-term market losses, you can still run out of money. Even if you have no flu-like symptoms, you can still die of a heart attack.
The Principal Problem is not Protecting Retirement Principal.
The Principal Problem is Creating a Retirement Income.
Break the mindset of protecting your nest egg from market losses. This should not be your primary concern.
Your mortal enemy is not a temporary drop in the stock market over the next few years.
Your mortal enemy is the permanently rising cost of everything you need and want to buy over your lifetime.
Inflation, the rising cost of everything we need and want to buy, is an insidious evil. It goes unnoticed in the short term. We rarely notice its effects month over month, even year over year. Especially during times of low inflation, it doesn’t faze us.
From 2011 through 2020, the average annual inflation was 1.73%2. When, over the course of a decade, you see the price of a Dollar Menu item at McDonald’s go from $1 to $1.18, you don’t panic. It’s not going to break the bank.
Indeed, it would take 40 years for prices to double at that pace. Most people wouldn’t have a problem if inflation remained at that rate. Over the average thirty-year retirement, a Dollar Menu item would go up to $1.68. No problem.
But we knew the good times couldn’t last.
We were all reminded that inflation still exists when it went from 1.4% in 2020 to over 6% in 2021. At 6% inflation, prices of everything will double in less than 12 years. Over a thirty-year retirement, costs will sextuple. Your McDouble went from $1 to $6. Is your “safe” fixed income portfolio or fixed annuity going to keep up with that?
Thankfully, no one expects that 6% inflation will continue for 30 years. It won’t because it can’t. Price increases of that much for that long cannot be sustained. While we don’t need to assume massive increases in prices, we cannot take for granted the small changes we’ve experienced in the last decade.
Even before the price hikes of 2021, I’ve been warning clients about the effects of inflation. Even at long-term historical rates of inflation of 2.5-3%2, the prices of everything you want and need to buy will double and perhaps triple in your lifetime.
Sure, your fixed-income portfolio can generate enough income to buy a $3 gallon of gasoline. And perhaps you’ll still be okay when the price is $4 and $5. But what about when the price hits $7, $8, or $9 per gallon and stay there?
The ongoing effects of inflation are far more dangerous than a temporary stock market decline.
We are taught to fear market crashes, not inflation. Market crashes are significant events. They draw headlines and doomsayers. Every time it happens, people declare, “The world is ending!” “This time is different!” “We won’t get through this!”
The 24-hour news cycle loves market crashes. They won’t let us forget them. They make them worse by perpetuating the fear. It’s a constant barrage of pundits and talking heads announcing the end of life as we know it.
We notice when the market crashes. We see stock market indexes go down by 20, 30, or 40%, and if we are invested in stock funds, we see our portfolios lose hundreds of thousands of dollars.
Crashes make noise. We notice. And we are taught to avoid them by investing in fixed income while in retirement.
Inflation is quiet. We ignore. An increase from $4.00 to $4.12 doesn’t make any headlines. We don’t notice it. We don’t fear it.
But here is the critical difference:
Stock market crashes are always temporary.
Consumer price increases are always permanent.
Every time the stock markets have crashed (and it happens all the time), they have rebounded and reached new heights. Every. Single. Time.
Equity markets will continue to crash. It happens once every five years on average. Common as dirt. You’ll live through five or six crashes during a 30-year retirement, with two or three being massive! They will always rebound. Equity market crashes are always temporary.2
When was the last time you saw prices come back down to stay? When Subway got rid of their Five Dollar Footlong, did they replace it with a Four Dollar Footlong? We may be happy that we are no longer chanting, “Five. Five-dollar. Five-dollar foot-looooong.” But we aren’t happy that a footlong is now $8 or more.
When prices rise, the increase is permanent.
We can create a strategy to weather a temporary decline in stock markets. But there is no strategy for a “temporary increase” in prices because they are never temporary.
We focus too much on protecting our retirement principal from temporary market declines.
We focus too little on creating a retirement income to outpace the permanent rise in prices.
Billions of dollars are spent every year to encourage people’s fear of temporary market declines and “solve” that problem with fixed annuities, permanent life insurance, and other fixed products. The fixed product market is highly profitable for insurance companies and banks. They make those profits on the backs of people who are focused on the wrong thing: protecting their retirement principal instead of creating a retirement income.
This book will show you how to create a retirement income strategy that will help you weather temporary market declines, but more importantly, it will help you defeat your mortal enemy.
What Can We Do About It?
Inflation is a cancer. It is going to take some chemotherapy to deal with it. Credit to Nick Murray for this analogy. The chemo is not fun.
Rising interest rates are not fun. Mortgage rates under 3% are great! Those now securing loans with 5-6% rates are not nearly as thrilled.
Much has been said about how “bad” the market has been in the first half of the year. Headlines like “The worst start since 1928!” and “The worst first half of a year since 1970” have grabbed our attention. But these entirely ignore the gains we’ve seen before this.
Since the market bottomed out in 2009, we’ve seen 17.6% annualized compound returns. The average is 10%. And in the three calendar years of 2019-2021, those compounded returns were 24% annually! If we now must temporarily give back a portion of those extraordinary advances to quell inflation, so be it, and bring it on!
Inflation must be destroyed, whatever it takes. If we must persist through a bear market, no problem. If we must delay buying or upgrading a home because we can no longer afford the increase, that’s not the end of the world. If we must endure some temporary discomfort to ensure our futures aren’t permanently damaged by persistent rampant inflation, then endure we must. The cure is not worse than the disease.
Milton Freidman continued his inflation analogy to alcoholism. “When it comes to the cure it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first, and the good effects come later. That is why it is so hard to persist with the cure.”
What Can I Do About It?
We have no control and little influence over macroeconomic issues. If your only plan to deal with inflation is to hope that it will go away, that’s a bad plan. So what you can you do about it?
Proactively plan to deal with inflation. If I’ve said it once, I’ve said it a thousand times. Your long-term investment strategy must be built first and foremost to combat inflation. That means having and sticking to an equity-based investment plan.
People I know (who are not clients of mine) will ask me in times like these if I regret having my clients invested in equities, now that they have sustained such “heavy losses.” My response: “Not in the slightest.”
Questions like this reveal the persistent insistence on only looking at the very short-term with no perspective whatsoever on the long-term, past or future. That’s a foolish and dangerous perspective.
What matters is to have a strategy that will outpace inflation over the long term. And the average annual 10% return of equities outstrips both inflation and any other mainstream investment strategy of that long term.
I would also gleefully point out that, even over the short-term, equities remain superior.
Over the last two years, the total inflation (as opposed to annual) is what, 10-12%?
What have your CDs wrought you over that time? 1%?
How about your bonds? Oh yes, the Total Bond Market Index is down about 14% from two years ago.
Are those holding up against your inflation over that time? A resounding “NO!”
Meanwhile, the total return of the S&P 500 over the last two years (ending June 2022) is still around 28%. Did you hear that?
Equities are up 28% from two years ago, even while they are “down.” We could sustain a much deeper temporary decline and still be above inflation.
So what can you do? Have an equity investment plan and stalwartly stick to it.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.