Three Steps to Protect Your Purchasing Power

“Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.”

-- Warren Buffett

This excerpt from Warren Buffett’s 2008 annual letter to shareholders came just after the Federal Reserve reduced the federal funds rate from 5.25% in Sept. 2007 to a range of 0 to 0.25 % in December 2008. At the time, the Great Recession – the longest since World War II – was in full swing.  

More than a dozen years have passed since the global financial crisis, and throughout that time, we haven’t seen any concerning inflationary pressures. The Consumer Price Index, usually a good gauge for inflation, stayed between zero and 3%. (For context, a healthy level of inflation ranges from 2- 3%.) Things changed, however, when the Fed began to increase stimulative efforts through the CARES Act to combat the economic effects of the COVID-19 pandemic. 

Source: US Bureau of Labor Statistics

Our higher inflation environment has now taken hold in a very meaningful way. Many individuals are already feeling the pressure of high food and energy prices, accelerated by sanctions relating to the crisis in Ukraine. With 25% of the world’s wheat coming from Russia and Ukraine, and Russia being the third largest producer of oil in the world, inflation is weighing on our collective thoughts – especially at the grocery store and the gas pump. From a historical perspective, these price increases are the largest we’ve seen since January of 1982. The biggest question, from a planning perspective, is: How do I plan for an environment where my dollars don’t go as far as they used to?

First, start off with what you can control.

1. Save Thoughtfully

Increase your emergency fund and saving toward supplemental university retirement plans. If your dollars can’t stretch far enough, you might need more of them to keep up with your lifestyle. Unfortunately, we can’t control the returns of the stock market, the future tax environment, or housing prices, even though those also can impact your financial goals in a significant way, so take steps now to assess and control your savings rate. A rule of thumb for an emergency fund is three to six months’ worth of savings. Tenured university faculty whose employment and income seem secure may not have thought about accruing savings or how to leverage their supplemental programs most effectively. It has never been easier to save extra money for retirement within university plans. Deferrals can come directly out of your paycheck, and you don’t have to think about putting extra money in the bank. Most universities offer at least one, if not several, supplemental savings plans that provide a tax-advantaged platform for savings, with the ability to defer either pre-tax or even Roth dollars within these programs. Ultimately, you want to look at both the short-term and long-term savings rate you need to reach your goals. The bottom line is, even if these price increases are temporary, having a plan in place to provide yourself more financial flexibility by saving as efficiently as possible makes good sense.

   

2. Reassess Risk in Your Portfolio:

Know the impact an inflationary environment could have on your investments, and take steps to insulate yourself. The Federal Reserve has begun combatting these inflationary pressures after a very accommodative monetary policy. The Fed’s funds rate increased in March, and further rate increases are expected this year, so it will be important to build an “all-weather” portfolio. High and rising inflation can be kryptonite for traditional asset classes. Both stocks and bonds can fall in unison during a high-inflation environment, according to Savant Wealth Management’s Chief Investment Officer, Phil Huber, and that isn’t welcome news for faculty on the cusp of retirement. Understanding your allocations across your university retirement accounts, outside brokerage assets, and your spouse’s investments can be complicated but important in helping you understand the risk level within your portfolio. When you look toward risk reduction measures, consider two areas: First, many of the insurance vendors within the university system offer guaranteed funds within their investment line-up that pay a minimum guaranteed rate. The interest rate is guaranteed not to go below a certain level, and the principal sum is guaranteed by the full faith and creditworthiness of the insurance company. Regardless of performance within the stock or bond market, these types of funds will not experience large fluctuations and can serve as a nice cornerstone to protect principal within a diversified portfolio. The second area to consider is less traditional asset classes or, more specifically, alternatives. Alternatives could include nearly any investment that falls outside the traditional stock or bond investment and can represent a wide variety of investment opportunities. We recommend working with an investment team that can deliver a handful of strategies with the goal of  providing a source of returns uncorrelated with traditional investments.  

3. Project Your Future

If a higher inflation environment is here to stay, understand the path you are following. Regardless of the environment, creating detailed scenarios can help you understand whether you are on track to meet your retirement income needs. Detailed retirement income projections are a part of any sound financial plan. Incorporating variables like your expected retirement date, savings within your university plans, income taxes, and long-term care considerations for later in life is a great starting point. If you are particularly concerned about inflation, stress test your portfolio for this type of environment moving forward to see if you can still meet your financial goals. Now is certainly not a time to panic but to show caution and thoughtfulness when reviewing your own finances. Just for some perspective, market expectations for inflation over the next five years are 3.5% and close to 3% over the next ten years. This would fall in line with the long-term average of 3%. These market expectations suggest that our environment is transitory and that we should not be shortsighted. Working with a comprehensive planning team that knows the variables that make up your financial life can potentially provide great comfort when surprises like this arise. Whether you are reviewing the effectiveness of where your dollars are, assessing risk within your investments, or seeing if you are on track to meet your income needs upon retirement, you will be better equipped to handle the unexpected with a solid plan.

This is intended for informational purposes only and should not be construed as personalized financial or investment advice. Please consult your financial and investment professional(s) regarding your unique situation.

Filbrandt, the University Division of Savant Wealth Management, is an SEC registered investment advisor serving clients in academia nationally. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com.  Our advisers have specific and in-depth knowledge about university employee benefit programs and retirement plans. We work with university faculty, physicians and other professionals. We are not associated with any university, or any retirement vendor and we have no access to your private retirement or personnel information.

About the Author

John Clarke, CFP®, is a Financial Advisor at Filbrandt, the University Division of Savant. He specializes in constructing comprehensive financial plans for new clients.