Retirement Readiness Part 3: Inflation

At SevenBridge Financial Group, retirement readiness is a cornerstone of our financial planning services.  In our last Retirement Readiness series article, we discussed life expectancy of our clients. Another key assumption that drives the results of the “What is your Number?” estimate is the future inflation rate applied to the ongoing spending needs of our clients. 

Inflation

Inflation is commonly represented by the Consumer Price Index (CPI) published by the Bureau of Labor Statistics.  The CPI compares the price of a basket of consumer goods over time.  While economists’ debate which metric is most appropriate to chart rising costs, the fact is that costs have risen over time.  When our clients consider retirement, SevenBridge advisors must analyze future spending needs on an inflation-adjusted basis to determine the most appropriate retirement plan.  It is important to understand that no advisor can pinpoint future inflation rates; it is an estimate, and things change over time.  Also, the inflation rate for certain goods and services vary at rates substantially higher or lower than the CPI.  For example, would you have imagined how quickly the cost of higher education or healthcare services and insurance has increased over the past 20 years?

Impact on Retirees

Inflation alone is not a bad thing for consumers.  If prices of goods are rising at controlled rates, that may be led by strong economic expansion, productivity, strong investment markets, and high wages for workers.  However, retirees can easily get left behind.  While the Social Security system in the United States has provisions for cost of living increases, most defined benefit pension plans do not.  With a reduction in earnings power and without proper investment allocation, some retirees may not take on enough portfolio risk to provide sufficient expected returns to combat rising costs.  The following chart, published by the Bureau of Labor Statistics, shows inflation rates by category of spending.  Notice that some of the categories with the highest inflation rates can impact retirees more than those still in the workforce.

Conservatism

Our SevenBridge advisors utilize inflation estimates of approximately 3%, based on historical data, for general living expenses.  For certain expenses, such as healthcare, our advisors may carve out these costs to apply a customized inflation rate to capture the estimated future costs for our clients.  It is our view that in retirement planning calculations, the element of conservatism should be employed to provide our clients with the best chance of retiring confidently and successfully. 

Only a piece of the puzzle

There are many additional assumptions and factors to consider when setting your retirement date and answering the question, “What is my Number?”  Next up in our series is Travel. 

Contact us today at 717-775-8662 to get started planning your retirement!

Clinton Smith III is a Sr. Wealth Advisor with SevenBridge Financial Group, a wealth management firm with offices in Harrisburg, PA and Denver, CO. SevenBridge Financial Group LLC (“SevenBridge”) is an SEC-registered investment advisor located in the Commonwealth of Pennsylvania.

SevenBridge Financial Group and its representatives are in compliance with the current filing requirements imposed upon SEC-registered investment advisors by those states in which SevenBridge Financial Group maintains clients. The views expressed in the referenced materials are subject to change based on market and other conditions. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.