Inflation’s Impact: How It Continues to Shape Your Financial Strategy

Inflation acts like a silent thief, gradually eroding the purchasing power of our money without us even realizing it. We might only notice the impact later, like when there’s less money in our checking account compared to the previous month or when our weekly groceries seem to fill fewer bags than before.

In a financial plan, the consequences of inflation can be even more severe over time, particularly for retirees relying on fixed or slowly increasing incomes such as Social Security or pensions without cost-of-living adjustments.

Rising Costs Negatively Impact Income

Let’s start with income, whether you are still working or retired. Some of the largest money problems in the U.S. are rooted in our incomes failing to keep up with rising costs. Take college costs, for example. One of the chief causes for the massive amount of student loans today ($1.77 trillion as of Q3 2023 according to the Federal Reserve) was the disparity between stagnant wages over the past decade and college tuition inflation, which has averaged 8% annually, according to Bankrate.com. 

This rate of increase not only dwarfs wage/salary COLAs, but most prudent college-saving investment vehicles as well. For parents trying to save and pay for their children’s college expenses, this type of inflation could ruin the best-laid financial plans.

Medical and healthcare inflation ranks right behind college tuition as one of the fastest-rising expenses, especially for retirees who tend to incur these costs more often than most other adults. According to Deloitte, a leading accounting and financial consulting company, from 2001 to 2021, healthcare costs increased a clip of 3.3% annually, nearly a third more than the average of all goods and services, and consumer incomes aren’t enough to keep pace.

Inflation also creeps into other sectors of our financial lives. From travel expenses, to purchasing a car, building supply and labor costs that add up into the price of a new home, each little tick up in inflation figures can compound into driving up the final cost of many of the goods and services we enjoy daily. It is for this very reason that the Federal Open Market Committee (Federal Reserve) has been so adamant about driving down the high inflation we experienced post-pandemic.

Wise Investments Can Curb Inflation’s Devastating Effects

On the asset side, inflation is a critical reason we need to invest our money wisely. As the post-pandemic years showed us, high inflation (and the accompanying high interest rates that arise as a result), can have a devastating effect on whether our investments (and purchasing power) are truly growing, keeping pace, or falling behind. For example, if inflation is cited as 6% but your bank CD or savings account is only yielding 3-4%, or your monthly pension benefit does not have a cost-of-living increase each year, the purchasing power of your money is falling behind. 

A Custom Plan that Considers Inflation

Considering all these factors, it’s crucial to factor in inflation when creating your financial plan for the future, whether on your own or with a financial advisor. Despite the availability of many financial planning software programs today, the inflation assumptions they utilize can widely vary. Over a 25-year retirement period, a person’s retirement expenses could potentially double by their final years.

Whether you’re already retired, nearing retirement, or saving for future goals, addressing the escalating costs of living—by assigning appropriate inflation assumptions to your expense categories—can increase the accuracy of your financial planning outcomes.

Inflation will always be a factor throughout our lifetimes, highlighting the importance of incorporating it into every financial discussion and strategy. 

Are you seeking a financial partner to support your long-term financial well-being while always putting you first? Keystone Wealth Management is here to assist. Your financial situation is unique, and we ask the right questions to create a comprehensive financial plan best suited to you. To schedule a no-obligation meeting, please get in touch by emailing dave@keystonewealth.com or calling (319) 883-3096. I look forward to hearing from you!

About Dave

Dave Becker is owner, financial advisor, and Chartered Financial Consultant® at Keystone Wealth Management, a full-service financial advisory firm based in Waterloo, Iowa. The firm offers a wide range of financial products and services to individuals, business owners, and corporations to help them pursue their financial goals. As a fiduciary, Dave always places his clients interests above all else. He enjoys simplifying the complex and helping clients move toward their goals and ultimately financial freedom.

Dave provides clear and concise communication, something his clients highly value. 

After graduating from Illinois State University in 1998, he immediately started helping others with their financial planning. In 2003, he earned the CERTIFIED FINANCIAL PLANNER™ designation (which he voluntarily resigned in February of 2023) and the Chartered Financial Consultant® designation in 2005. Over the span of his career, Dave has guided his clients through some of the most dynamic and uncharted situations for investors, including the burst of the dot.com bubble and the subsequent correction from 2000-2002, the 2008 financial crisis, a global pandemic and interest rates at 41-year highs.

Dave, his wife, Staci, and their four children (Christian, Anna, Carson, and Jonah) reside in Cedar Falls, Iowa. In addition to his work responsibilities, Dave has also volunteered at school, coached soccer and robotics, served as a trustee at church, led a Cub Scout pack, and cheered his kids on in everything they do. He has always said that he makes his best investments at home. In his limited spare time, he also enjoys watching college football and Formula 1 racing. To learn more about Dave, connect with him on LinkedIn.