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Sound Advice: February 23, 2022

Perspective on Inflation 

Inflation doesn’t affect everyone in the same way.  It does its worst damage when household income is derived in large part from sources that are not adjusted for it.  For example, if one has a pension or annuity that does not provide cost-of-living adjustments, long-term inflation will eat into purchasing power significantly.

Social Security, however, which is an important income source for many people, is adjusted annually for inflation.  Benefits went up 5.9% this year, roughly in line with recent inflation trends.  That adjustment followed a lengthy period when inflation was unusually low and annual increases in benefits were modest.

Along with Social Security, many retirees depend on withdrawals from investment accounts.  Although some may worry that because of rising inflation retirees will need to reduce spending and take less from their investment portfolios, such a quick reaction may be premature.  Historically, the year-over-year inflation rate has had zero predictive value with respect to portfolio withdrawals an individual could have sustained over a multidecade retirement.

Furthermore, research shows that retirees tend to reduce their spending as they age.  Though spending patterns vary, moderate reductions in annual inflation-adjusted spending are common.  This natural slowdown in spending provides retirees with a useful cushion to rising prices.

Fast and deep market losses on their own would typically not have impaired retirement income (if investors resisted the temptation to sell and lock in losses).  Following the 1929 market crash, deflation (a decrease in prices) cushioned the blow for a hypothetical retiree.  In 1947, a spectacular spike in inflation to 20% was accompanied by a flat market, but those conditions didn’t last long.  These situations were exceptional, but they weren’t as harmful as the prolonged poor returns and inflation in the 1960s and 1970s.

Nobody knows whether current heightened inflation will last long or be paired with sideways markets.  Since it is not prudent to take evasive action until there is something to evade, folks will need to monitor changing conditions patiently to know whether adjustments are needed to keep their retirement income on track.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370 

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

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