Understanding Inflation: How It Impacts Your Financial Plan and Retirement, Ep. 244

Five Hot Topics from the Capitalist Investor: Inflation’s Impact on Retirement
In this week's episode of the Capitalist Investor, hosts Derek and Luke dive into the crucial topic of inflation and its far-reaching effects on financial planning, especially as it pertains to retirement. Here are the five hot topics discussed in this enlightening episode:

1. Inflation’s Role in Financial Planning
The episode starts with Luke and Derek stressing the importance of accounting for inflation in any financial plan. Many people make the mistake of calculating their future needs based on current expenditure without considering how prices will rise over time. Derek uses the example of the so-called "yellow pad financial plan" where couples often calculate their retirement nest egg by multiplying their current annual expenditure by the number of years they expect to be retired. This simple approach overlooks the critical factors of inflation and taxes, which can significantly erode the purchasing power of their savings.

2. The Illusion of Stable Prices
Luke highlights how a decade ago, inflation was minimal, leading people to believe that prices would remain stable indefinitely. Using everyday examples like the price of a Diet Coke or the Taco Bell dollar menu, the hosts show how inflation has slowly but surely impacted the cost of living. Derek even mentions the recent spike in the cost of a chili cheese burrito to an astonishing $5.29, underlining the tangible effects of inflation in ordinary life.

3. Inorganic Economic Growth
One of the more profound discussions involves the concept of inorganic economic growth driven by excessive money printing and debt cycles. The hosts explain how this type of growth has distorted economic conditions. Unlike a booming economy fueled by organic growth—where wages keep up with inflation—today’s environment is characterized by higher prices without corresponding increases in most people’s incomes. This disconnect particularly harms middle-class Americans, who find their purchasing power shrinking.

4. The Ever-Changing Economic Landscape
Luke reflects on how much the financial advisory landscape has changed over the past few years. Entering the industry in the late 2010s, he notes that inflation was not a significant concern back then. Fast forward to today, and inflation along with large government spending and deficits has dramatically shifted planning strategies. This brings into focus the necessity for continuous adaptation and vigilance in financial planning.

5. The Importance of Ongoing Financial Planning
The episode wraps up with both hosts emphasizing the need for an annual review of financial plans. Given the unpredictable variables like inflation and changes in tax laws, a static financial plan is insufficient. Derek advises that updating the financial plan at least once a year will help account for new inputs and changes in both personal situations and the broader economic landscape. This persistent updating ensures that the financial plan remains relevant and can effectively guide people toward a stress-free retirement.
In summary, Derek and Luke underscore the importance of recognizing and adapting to inflation in retirement planning. They remind listeners that staying informed and flexible are key to navigating the ever-changing financial landscape. For anyone serious about securing their financial future, understanding these topics is not just helpful—it’s essential.

Transcript

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Hello, and welcome to this week's episode of the Capitalist Investor. As always, you have me, diamond hands D, and only Luke cool hand Luke, this week. How's it going? I love AC, only that doesn't make me sound. Well, we're a man down, but obviously, your presence here is unbelievable. I appreciate it. Besides the tornado that's about to come outside, it looks like. Yeah, it does not look good out there. But today we got good old important. I would call it a little bit boring topic, but we, you know, we need to talk about it because it's something that factors into everyone's situation. Our spending habits, our overall financial plan. That's the big I word, inflation. How is inflation going to impact your retirement plan? How's it going to impact your spending habits down the road? All of this needs factored into your financial plan. So let's start off with the question is, what do you see as the biggest mistake, Derek, in someone's financial plan or situation not accounting for inflation? Yep. So I would say, honestly, we kind of call it like the yellow pad financial plan. So you basically sit down at the kitchen table or whatever with your spouse, and you figure, hey, we're spending$72,000 a year, right? And you're 65, so you want to retire. So you're gonna factor in, you know, 25 years of retirement. So you take that 72,000 and you multiply it by 25 years, and you're like, hey, this is. This is the nest egg that we need to shoot for. Right. But you know what? What? That doesn't account for it, really. Two things, taxes and inflation. Yep. So, you know, we've talked a lot about taxes. Obviously, you know, it's going to be a huge issue. Actually, maybe something. I saw Illinois pass, like, a giant spending bill. Did you see that? No. Yeah, we'll have to. We'll have to look into that one. For good old Chicago. Just spending all of our money as usual. Yeah. I think it was a hefty tax increase across the whole state, so we'll have to check that one out. But, yeah, so we've talked a lot about taxes, but inflation is something that we obviously have to factor in. Right. So probably, if we're talking financial plans ten years ago, right. There is no inflation, really, to speak of. At that time, no one knew what inflation was. Everyone just like, oh, this diet coke that I bought for $2 is still going to remain$2. They didn't see change for five years. Or a Taco Bell dollar menu. Stayed taco Bell dollar menu for a while. Like now it's a $4 menu. Yeah, absolutely. So, um. Yeah, I saw, I pulled up that tweet we talked last week about the chili cheese burrito being$5.29. Did you. I wasn't here. It's. Yeah, it's wild. It's wild. So, yeah, you know, if really, once we get closer to retirement and we're in the financial planning, you know, discussion, really understanding how much money you spend and then increasing that for inflation, that's really step one, job, one of the financial plan. Right. We have to have those two things. Right if the plan is going to be worth anything at all. Yep, I agree. But the thing is also that you really need to pay attention to is how inflationary issues also impact your income. You know, is your income going to keep up with inflation? Like, there's a couple reasons why it would or wouldn't. Right. If the economy's booming and inflation's, you know, a. Caused by a strong economy, a truly organically strong economy, that's not necessarily the worst thing in the world because there's just strong demand out there and your incomes probably are keeping up. The problem is the past four years, it's almost been this inorganic economy that we've built through the printing of trillions of dollars, funneling money through the top of the economy, not trickling down throughout the economy. So now you have essentially these deflationary issues where business owners are trying to crunch numbers, not trying to pay employees as much, but you're still going to the grocery store and still having these higher prices. So it's like this inorganic growth that we've had from the debt cycle that we're in has made it tough for middle class Americans rather than a truly organically high inflation environment just driven by a strong innovation cycle of America. Yep. Absolutely. So something obviously that we're going to be keeping an eye on this year, the end of this year, may have a very large impact on what inflation and taxes are like going forward, and those are, frankly, huge issues for retirees. Right. And we haven't really talked about that, really pre Covid that that was never really a discussion, you know, whatsoever. Right. And now I feel like before COVID. Like, our life was a little bit easier here on the planning side, advisory side. Like, it just, it seemed like for 14 years straight. And, I mean, I didn't get in early 2008, 2009. I was in like the late 2010s when I got into this industry. But, like, when I saw, you know, how different things have become the past four or five years. It's very interesting from my point of view, because when I came in, we didn't have inflationary issues. Really. There wasn't anything too crazy going on with taxes, investments like we didn't have print trillions of dollars, didn't seem like we had spending deficits, but wasn't absolutely insane. So like, it's just the game's changed a lot the past four or five years. I can't imagine someone doing this for 30, 40, 50 years and seeing all the different cycles and how the games change. But at the end of the day, what we've seen is how much bigger the government's gotten. That's one of the biggest factors since the 1970s. Since 1971, we got off the gold standard. We allowed the pretty of trillions of dollars, allowed it to happen, essentially allowed us to inflate the economy. So this is why you want to make sure that the people you are talking to, the people that you have, have some credentials behind them because they have to keep up, they're forced to keep up with the current environment. CPAS, CFAS, JDS, the people we have on our staff, you know, they have to do continuing education, make sure they're keeping up with the world. They don't have to just golf on the golf course and golf four or five days a week and don't have to pay attention to the current environment. Right? Yep. For sure. Yeah. And it's, it really. I know we do talk about this and maybe we can, can wrap up on, on this point, but, you know, having a financial plan that's updated, you know, annually at least, is, is so important because, you know, we've been telling that to people for, you know, basically my whole career. But we've been seeing drastic change. Well, maybe not drastic changes, but, but people's plans have been altered based on the new inputs that we're putting in there. So we haven't jacked inflation up to 4.5% or anything like that because it's meant to be for the length of the financial plan. But we have increased that return rates if we're at all time highs right now. And some of that is being artificially pumped in there for printing money or passing out jobs, whatever the case may be. We need to factor, factor those things in for inflation and spending. So having that plan updated constantly is going to be important. I tell that to people when people come in and say, hey, maybe I don't need to start planning right now. Well, you can plan right now and I can guarantee you in twelve months you're going to need an update to that plan because things are going to change in the world. Things are going to change in your situation. It's a great guidepost to have when you're planning your retirement. Again, I'll end with this. Our job, I say this all the time. Our job is not to preach to everybody, to save the most amount of money and make the most amount of money as possible. Have the perfect financial plan that you need to just always be conscious of everything. That's not necessarily our goal. Our goal is to make sure our clients are happy and meet the goals and objectives they want to achieve and are not stressed out in retirement because stress is the number one killer. Absolutely. Absolutely. All right, well, good stuff this week on the planning corner there. If you guys have any questions, comments, show ideas, hit us up at info connect.com and we'll talk to you next week. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.