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How Does Inflation Impact My Comprehensive Financial Plan?

How Does Inflation Impact My Comprehensive Financial Plan?

Inflation
5 May 2022

Inflation devalues money, yet there remains a debate as to whether inflation has the potential to be a net positive or negative in the context of the stock market. Inflation makes it much more challenging to plan for retirement based on today’s prices. If inflation continues through 2022 and beyond, the financial goals set for retirement will have to be significantly adjusted to account for the ongoing devaluation of money.  

Some claim that inflation is helpful to stocks as their values have the potential to inflate in unison with the devaluation of money and a corresponding rise in revenue.  Let’s look at how inflation will impact your comprehensive financial planning in OH for the future.

 

People are asking a great question: “do geopolitical events impact my comprehensive financial plan?” 

 

The Best Financial Planners Account for Inflation

A CERTIFIED FINANCIAL PLANNER™ (CFP®) will develop your unique, comprehensive financial plan. This professional should be fee-only and a fiduciary, meaning they make investment decisions on your behalf to advance your bottom line—nothing else. In this case, you can rest assured knowing that your fiduciary financial advisor has a keen eye on inflation with your best interest in mind.  

Though there is the possibility of inflation proving transitory and giving way to deflation, money tends to lose its value over time. The ongoing devaluation of the U.S. dollar should prompt your planner to create your custom-tailored financial plan with inflation squarely in mind.

Though significant inflation can force hard-working Americans to extend their timeline for retirement, those who choose a financial advisory firm with merit won’t have to remain in the workforce much longer than initially anticipated. The bottom line is credible fiduciaries with a duty of care to you will plan for the depreciation of your financial nest egg through inflation and make every effort to offset and outgain losses stemming from the devaluation of the dollar.

Suppose inflation continues and your investment portfolio does not keep pace with the ongoing devaluation of money. In that case, you might still be able to retire by your original target date, yet your purchasing power wouldn’t be what you expected. Inflation hikes prices, meaning the purchasing power of a dollar gradually declines. 

Unless your planner makes strategic decisions on your behalf through active investing that results in gains during bear markets, bull markets, and those characterized by inflation, you will face a choice of extending your career or retiring on time with significantly less purchasing power.

wooden blocks symbolizing inflation

Inflation Leads to Economic Recessions

Ongoing inflation is likely to spur higher interest rates that ultimately shift the business cycle from a peak to a trough. Rising interest rates make it that much more financially punitive to borrow money. The higher cost of borrowing money induces a recession.  

Though the Federal Reserve’s anticipated interest rate hikes throughout the remainder of the year and possibly into 2023 will help keep inflation and price increases within reason, the ensuing recession will reduce the value of investor portfolios. A declining portfolio extends the timeline for retirement that much longer.  

The saving grace is an advisor who strategically plans on your behalf through comprehensive and active investing that generates positive returns during business cycle peaks and troughs and the periods in between.

Will Inflation Hit an Inflection Point?

There is plenty of discussion as to whether rising interest rates will cause inflation to reach an inflection point in which it stops increasing and starts decreasing, creating deflation. The prevailing consensus of economists and market experts is that inflation will not reach an inflection point. Instead, interest rate hikes are likely to slow the pace of inflation.  

Higher prices resulting from inflation reduce consumer spending power, meaning consumers are likely to purchase fewer items and services and potentially trigger a lengthy recession that doesn’t do your investment portfolio any favors. Even if corporate earnings and revenue increase in the year ahead, those increases won’t mean much as they are likely to result from ongoing inflation instead of heightened consumer demand.  

Investors are likely to respond accordingly and choose to hold or sell shares of publicly traded companies instead of adding to their current positions. The reluctance to purchase additional shares of public stocks during an extended period of inflation can cause a bear market.  

If a bear market occurs, it might not last long simply because it doesn’t make financial sense to park money in an interest-bearing bank savings account or other investments with low rates of return. There is no guarantee money placed in a bank savings account, CD, bond, or money market account will keep pace with inflation or outpace inflation. As a result, money saved or invested in such a conservative manner is likely to lose value if inflation continues.  

The phenomenon described above is likely to steer many more investing dollars toward comparably risky securities such as stocks as they are more likely to keep pace with inflation. Money movement into stocks props up the market, potentially setting the stage for a bull market and a transition out of an induced recession meant to ward off runaway inflation. 

There is No Inflation Safe Haven

words are you ready in front of a financial advisor

The industry’s best CFPs are forthright when discussing inflation’s impact on clients’ investment dollars. Though conventional wisdom states gold and other precious metals are safe havens during periods of inflation, merely maintaining pace with inflation through such traditionally reliable value stores might not be enough to keep you on track for your target retirement date.  

There is no easy answer to the challenge presented by an extended period of inflation. Those who lean on a professional for active investment management that adjusts to the pace of inflation and the dynamics of the domestic and global economy are most likely to reach their target financial goal.  

A diverse portfolio consisting of high, medium, and low-risk securities combined with steady savings and a CFP’s overarching strategic guidance is the approach that is most likely to prove successful even if inflation lasts for several years. Account for the risk posed by ongoing inflation, trust your financial partner for guidance, and your money will continue working just as hard for you as you did to earn it in the first place.

 

How is higher inflation impacting your financial life? Discuss inflation-aware financial planning in Akron-Canton, OH, with McGervey Wealth Management.

 

Sadly, a lot of financial advice falls short, as most advisors don’t provide the continuous proactive service needed to achieve your goals. Or they don’t possess the years of experience to do it accurately. Read more on how we can help!

Our team at McGervey stays laser-focused on building your wealth in “good” and “bad” markets. Ask us your questions and share your concerns. You should never feel alone or lost with your finances, no matter the market conditions. You deserve to feel safe and secure as you build a comfortable financial future. 

Call our team, who looks forward to working with you for years to come. Or start by reaching out to get your wealth score. Knowing where you stand financially will allow us to customize the right financial plan for you.

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More About the Author: Michael McGervey

Michael serves as a resource to executives and business owners, assisting them in making proactive and informed personal financial decisions. He is also a member of McGervey Wealth Management’s Investment Committee and is responsible for investment research as well as the execution of the firm’s portfolio strategies.