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March 17, 2022 at 03:41 PM
What You Need to Know
- A financial plan needs to be updated when market conditions shift. Be realistic regarding inflation expectations.
- Advisors should run the numbers using different assumptions, such as inflation at 5% or 6% for an extended period.
- Since there's no way to determine future health care costs, advisors should encourage clients to take out long-term care insurance.
The question advisors hear most often from prospective clients is probably “How much money do I need to have before I can retire?”
Although it’s a question almost everyone asks, there are no easy answers because everyone’s situation is different. While the markets were soaring and inflation was virtually nonexistent, people didn’t seem to worry about that so much.
But now, with inflation and interest rates on the rise, there’s a corollary to that initial question: “How can I be sure I won’t outlive my money?”
That’s really the big question today, because underestimating the impact of inflation is among the biggest mistakes that people planning their retirement can make.
For anyone pondering those important questions, the first step should be to sit down with their advisor and take a careful look at their financial plan. And if they don’t have an advisor and a plan, they should get one in a hurry.
A financial plan is not a set-it-and-forget-it proposition. It’s a living and breathing document that needs to be nurtured and cared for. When market conditions begin to shift, as they are now, the key is to update that plan based on the current environment and to be realistic with regard to inflation expectations.
In our own financial planning work with clients, my team and I have always included an inflation factor of 4%. Looking at the short term and the rise in prices over the last six months, that number might seem a bit too conservative, because inflation right now is clearly running higher than 4%. But we need to remember there were years when it was clearly less, and we are planning for the long term.
The inflation rate hasn’t been above 2.5% for the last 10 years, so we continue to believe that 4% is a good projection and we don’t need to update to the current inflation level.
It looks as though the Federal Reserve is ready to start actively fighting inflation as it moves above its projections. We’ll continue to watch the numbers closely and will readjust if conditions change dramatically.
But while we wait for the Fed to take action and inflation to stabilize, this is a good time for people to sit down with their advisor and make a pragmatic assessment of the totality of their assets. They should be looking at their various retirement cash flows — Social Security, pensions, annuity payments — and factoring those in when determining if they have enough money saved to adequately fund this retirement.
