Financial Survival Tips: How to Navigate Inflation

It’s no secret that inflation is higher than we’ve seen in the last forty years. As of 2024, inflation is still very high. Prior to COVID-19, inflation was basically non-existent, with decades of inflation rates of 2-3% or lower. Because of this, inflation has caught people by surprise. Those of you who are retired or are preparing to retire need to be aware. Remember, inflation won’t make you broke, but it’ll make your lifestyle broke. In this article, we’ll go over financial survival tips for how to navigate high inflation. Read all the way to the end for a special tip on how to take advantage of high inflation markets!

What is Inflation?

In short, inflation is too much money chasing too few goods. Back in 2021 and 2022, the government was printing and handing out money. We saw $4-6 trillion put into the money supply, and people were spending because they had excess cash. Now, that cash has come back down to normal levels because most people have spent it. Through the pandemic, we saw shutdowns that created supply chain issues, which contributed to inflation. However, the key to inflation is money being printed and added to the money supply; that is what has driven this period of high inflation.

As we mentioned, inflation won’t make you broke, but it will make your lifestyle broke because it creeps up on you. Every day, we consult with retirees to update their plans and adjust their budget to maintain their lifestyles. Over the last few years, we’ve seen families up their budgets easily by $500-$1000 per month just to keep up with inflation.

Will Inflation Come Back Down?

Although inflation is high, it will come back down. In 2021, the Fed said inflation was transient. Inflation has come down a bit since then, but it is still above 4%, missing their 2% target. To drive inflation down, the Fed will need to keep interest rates high. However, even when rates and inflation come down, there are certain areas where we won’t see a decrease, such as food and energy costs. Though prices will come down on many things, the prices on staples won’t come down.

As you’re thinking through your retirement planning, you must factor in inflation through the years. The money you’re spending on goods & services must go up year over year to maintain your lifestyle. At REAP Financial, we like to use the 100-year average, since putting in a specific number for inflation for the duration of your retirement is not realistic. However, if you use a 100-year average and update it once a year, you’ll see a very sensible fluctuation.

How Does Inflation Impact Your Income Plan?

When we talk about your budget, we’re really referring to your income plan, generating enough income from your portfolio to sustain your lifestyle in retirement. But how does inflation impact your income plan? It’s not just that you’re distributing money from these accounts, but the money must also be invested in a way that keeps up with inflation. Back in 2020 and 2021, the Fed cut interest rates to zero. If you had money in the bank or CDs at that time, you weren’t making anything. We call that dead money. One of the benefits of a high-interest rate market, like now, is that you can get competitive rates on safe money, like money markets. As a conservative investor, it’s never been easier with so many options. Staying conservative your money is growing at 3-5%, but there’s still a question of whether that’s enough. With inflation at 3-4%, 5% return may not be enough to sustain you. That’s why your investments and portfolio must be designed to hedge against the rising budget you’ll have over the coming years, due to inflation.

How to Inflation-Proof Your Portfolio

The first way to inflation-proof your portfolio is to have a proper investment mix. You’ve likely heard about diversification, but it is important. Your portfolio has to be designed so that when the market is stalling, you have assets that can keep growing. This hedging helps you guard against principal loss and stay ahead of inflation. It is a balancing act, between risk and reward, which is the real key to hedging against inflation.

The second is having a nice mix of assets that will grow conservatively. After that, you’ll have moderately aggressive and aggressive investments. Those aggressive investments help you really help keep you ahead of inflation, since those assets can grow substantially. However, you can’t have all aggressive investments because that would put you in a risky position overall in retirement.

You’ll also need to consider your withdrawal rate. Years ago, most advisors assumed a 4% withdrawal rate, but today we think that’s too high. Today, we want to see retirees at a 1% or below on their withdrawal rate, especially through the first decade of retirement. That’s because we don’t want you to drain those accounts, which should be working for you throughout retirement, too early. That is why it is so important to monitor your withdrawal rate. At REAP Financial, most of our successful retirees keep their withdrawal rate at or below 1% for their first decade of retirement, and it makes a significant impact on the longevity of their portfolios.

Silver Lining of Market Volatility

Remember that high-interest rate environments mean safe money is paying higher and higher rates. While we don’t believe that rates will go up soon, we also don’t think it is likely they will go down drastically. That means the days of safe money paying out well are here to stay for a while. On the other hand, when it comes to inflation and high interest rates, that can make markets very volatile. The silver lining in this market volatility is the potential that you could convert IRAs or 401ks into Roth 401s and IRAs at a significant discount. If you convert the shares in your IRA to a Roth when they’re down 20%, when the market turns around, you’ll have your shares and the gains tax free. Although we never know when the market is going to fall, you can use this strategy to take advantage of it.

Retiring with High Inflation

Although it can be overwhelming to retire in times when inflation is high, preparing correctly can set you up for a successful retirement despite inflation. At REAP Financial, we share all the tips and strategies to ensure you’re on the right track to your best retirement. If you want to learn more, consider watching one of our YouTube videos on Retiring Today in High-Inflation Environments.

Retirement & Financial Planning for Austin, Texas Retirees

If you’re an Austin, Texas retiree or nearing retirement, our expert team at REAP Financial is here to guide you through the complexities of retirement planning in today’s high-inflation environment. We specialize in creating customized strategies that align with your financial goals and help protect your lifestyle from the impact of rising costs. Let us assist you in securing a stable and prosperous retirement. Contact us today to schedule a consultation and take the first step toward a confident retirement in Austin.

Phone: (512) 249-7300