Why Seemingly Low Inflation Really Is A Threat – Forbes

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Inflation, we keep hearing, is low. But thats deceptive. Lewis Walker, a financial planningand investment strategist atCapital Insight Groupin Peachtree Corners, Ga., warns about how even seemingly minimal price increases can mount up over time. And he has some ideas for how to prepare for that.

Larry Light: Simply eyeballing the latest inflation numbers suggest they are tame and we shouldnt worry about them.

Lewis Walker: Year over year, all-items inflation through November averaged 1.2%. Core inflation, excluding food and energy costs, averaged 1.6%. The U.S. Federal Reserve has an inflation target of 2% annually.

Per the Fed, an annual inflation rate of 2% is most consistent with the Federal Reserves mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing and investment, which contributes to a well-functioning economy.

Light: How does a 2% annual decrease in your moneys long-term buying power contribute to your personal or familys well-functioning economy?

Walker: The numbers quoted above are averages. How do price pressures impact the things you use and need frequently? The cost of food in general through October is up 3.3% year-over-year. If you have hungry teenagers at home, especially boys, personal food expenditures are probably up by more than the index.

With work-from-home mandates, fuel costs most likely are down for the year for some workers. But as vaccinations kick in and the economy increasingly revs up, transportation expenditures are likely to increase. The new administrations emphasis on climate change will increase the cost of fossil fuels, electricity, transportation and shipping costs, etc. Infrastructure spending could increase pressures to raise fuel taxes.

Light: Yes, outside the official composite inflation gauges, some prices have really vaulted.

Walker: What are the big three goals for most families? One, own a home; two, educate kids; three, retirement and financial independence. New home sales have jumped to a 14-year high. Big city woes and work-from-anywhere trends are driving people to the suburbs, exurbs and smaller towns. List prices are up an average of 13% nationwide over 2019 through November.

Record low mortgage rates fuel demand, even as many younger couples are challenged to come up with down payments. Lumber prices are up 170% since April, adding $16,000 to the price of an average new single-family home.

Light: The burgeoning costs of education are remarkable.

Walker: Some students and parents are questioning the relative value of a high-priced private college education, but even costs at public colleges have outpaced inflation. Between 2008-2018, average four-year costs across all 50 states have jumped 34% overall, 24% adjusted for scholarships and grants. Georgia, my home state, has cut funding to public colleges substantially over the last decade.

Light: And retirement can last a long time, as inflation and taxes eat away at principal.

Walker: People in general are living longer spurring increased longevity planning. Inflation and taxes warrant consideration. Say you want to have at least $1 million in your 401(k), IRA or other qualified retirement plan by retirement. You want to take out 5% per year to fund your lifestyle, or $50,000 per year.

The withdrawal is taxed as ordinary income. Suppose your combined average federal and state tax rate is 20%. Now you have $40,000 per year, or $3,333 per month to spend. How does that fit into your retirementgo-go years scenario filled with travel and experiences? Need $2 million plus in your nest egg? With the deficits were running as a country, at some point, taxes will rise, and most likely, so will inflation.

Light: We always hear how low inflation has been for years, but that is compared to the double-digit rates of the 1970s and early 1980s. It does take a toll over time, even with small incremental increases, right?

Walker: If you retired 10 years ago, it now takes $1.19 to buy on average what $1.00 bought in 2010. Suppose you live 25 years in retirement. For someone who retired in 1995 it takes $1.71 to buy what a dollar did when they retired.

But thats not the whole story. Health care costs continue to rise, and in the slow-go and no-go retirement years, that becomes an even bigger burden on retirees, and those that love them and who may have to care for them. Many of your readers are senior citizens, or will be at some point. How are they planning to avoid being a strain on adult children? Many of my clients, especially women who on average outlive husbands, are quick to say in essence, I love my kids, but I dont want to be a burden on them or live with them.

Light: How should people prepare for this?

Walker: Elder care attorneys have seen an uptick in business as pandemic scares have forced people to confront mortality. Do you need to update your living and testamentary estate plans? Are wills, trusts, powers of attorney up-to-date? Read them again. Are executors, trustees, beneficiaries, and attorneys-in-fact still alive, still capable?

At your current age, as you look forward, is your insurance portfoliohealth, life, disability, property and casualty, liability and umbrella liabilitycurrent, providing adequate what-if coverage? Inflation impacts the buying power of insurance settlement dollars.

Inflation, simply, is shrinking buying power. Taxes further diminish buying power. Save and invest wisely.

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Why Seemingly Low Inflation Really Is A Threat - Forbes