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  • Writer's pictureMaestro Associates

You Don’t Have to be Scared of Inflation

Updated: Jan 11, 2023

We haven’t seen real inflation for so long and frankly, people forgot about it. Dating back to 1996 the US has only had 5 years with over 3% inflation, the high being 3.8% in 2007 and the average is probably closer to 2%. And we haven’t seen 5% inflation since 1990. But now that level of inflation is here, it is real, and it isn’t going to stop anytime soon.

If you have tried to purchase anything that requires shipping and supply chain over the last year you are definitely seeing the effect of rising prices. We have heard it covered as supply chain issues, COVID labor shortages, but these economic factors mixed with monetary policy are clear signs of inflation.

If we use lumber at Home Depot as an example:

In November 2019 2x4x8 prices were $2.98 per board.

By April 2021 that same piece of lumber was around $8 per board.

It has now “come down” to about $3.98 board.

In that example, we are still looking at a price increase of 30% in just under 2 years. Examples like this have been billed as reactive supply and demand pricing, but the reality is we aren’t going to see a $2.98 price again. These price increases are here to stay across the board.

We are all going to see this trickle down into our wallets in other ways too. For example, the price of oil has doubled in a year and all signs are pointing to skyrocketing energy costs with forecasts of another 50% increase by summer 2022. This will have an effect on airline tickets, heating, and filling your car at the gas pump.

Let’s skip over the heavy discussions about what contributes to inflation and jump right to what this means for you.

The most important thing you can do is realize that inflation is already here and will continue to increase for the foreseeable future. Many economists forecasted inflation in the mid 5% in 2021 and the Social Security Administration is applying a 5.9% inflation rate to those living on social security. These can be alarming numbers when you start to look at what they may mean for you a few years down the road.

How do you plan for 5% annual inflation for the next ten years?

The most basic answer is to have a plan that goes beyond how your money is invested. It means understanding the effect that changes in cost of living and related monetary policy will have on your ability to spend comfortably and achieve your life goals.

  • What will your income streams be?

  • How will you structure your expenses?

  • What should your insurance, tax, and estate planning strategies look like?

At Maestro Associates we have been adding inflation scenarios into all of these aspects of our clients’ financial plans for over a year now and we are tracking that every six months. We look at inflation through the lens of cash, investments, retirement plans, insurance, taxes, and estate planning. We account for life milestones they are planning on and each of our clients is provided multiple scenarios in each facet of their financial plan so that they are prepared for decisions that they may have to make in the 1-, 5-, or 15-year time horizon.

If you are working with a financial planner you should ask them these questions:

  1. How are you setting up my assets for rapid inflation over the next decade?

  2. What strategies should I take to be in a position to make money with rising inflation?

  3. Given my current income sources, what 3 steps can I take to prepare for rising inflation?

  4. What is my insurance strategy as we move into rapid inflation?

  5. How do I prepare for changes to my future tax bracket?

It is our experience that most financial advisors can only answer questions 1 & 2. If yours doesn’t have answers to all five questions immediately for you, or if they have to “phone a friend”, that should be a red flag that they are more interested in the percentage they make on your investments than your full financial picture. In that case, you are not in a position where you can plan for 5% inflation for the next 10 years.

If you have questions about your financial picture, or if you’d like a new opinion on how you may consider answering these questions given your financial situation, drop us an email with the subject line - How do I plan for inflation?

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