Episode 30: Is Inflation Wrecking Your Retirement Plan?
Jul 15, 2022
On this episode, Isaac Wright, CFP®, ChFC® and Ricky Lafon, MBA, CFP®, RICP®, WMCP®, discuss several high-level concepts that you can implement to help you be prepared in this economic climate. The cost of gas, groceries, and other necessities are at an all-time high. Many are faced with the decision of going back to work or delaying their retirement due to rising costs. Consider having an investment strategy to help manage your income and expenses.
Here are just a handful of the things that we'll discuss:
- How to review your expenses and identify your variable rates.
- How to review your income plan before making an employment decision.
- Consider annuities because of their guaranteed income and increases for inflation.
- How an HSA can serve as an avenue for helping with rising medical costs.
- How to work with an advisor to create and adjust income streams over time.
Isaac Wright: Welcome back to Wright Money Tips. Right now, we’re in the middle of the summer, but obviously what’s heated up here is inflation. So, we wanted to kind of have a special discussion. This is something that I really wanted to bring to the table because a lot of us are starting to panic about the cost of goods, the cost of gas, the cost of groceries. I think the average family right now is spending between $400 and $500 more a month being able to make ends meet. And that obviously means a lot of people are having to reconsider going back to work if they’ve retired. And for those that are maybe trying to retire or thought they could, they’re starting to reevaluate that decision.
So today, my guest with me is Ricky Lafon. Ricky is our senior advisor here at Financial Dynamics. You know, Ricky, I think a lot of the things that we are going talk about today are things that we’ve seen on the news. It’s definitely hitting people in their pocketbook, and we haven’t had inflation like this in 40 years.
So, why don’t we take our time today? And let’s talk about how to take some of the drama down and for all of you. I’m not saying it’s not painful to go to the gas pump, but we definitely don’t want you to make any snap decisions around your lifestyle. And we wanted to talk about some checklist items that may be helpful for you as you start figuring out if you have to start looking at things differently relative to your retirement or your work career, if you will. So, Ricky, why don’t we start there and let’s maybe talk a little bit about some of the steps, lead us off a little bit about some of the things I think we talked first foremost about expenses.
And I think it’s a great thing to start with. So, yes, discretionary income is down, but where do we want to go here with our viewers to let them know, “Hey, let’s slow down and let’s look at maybe some other factors.” So, let’s start with expenses. Let’s talk about that.
Ricky Lafon: You know, you need to have a good handle on your expenses to have a good retirement plan in place and with everything going on with inflation, of course, things are getting more expensive. To what you just said, groceries, gas, everything is going up, but we also have to be sensitive to what the Fed is doing in raising interest rates because things are going up like personal credit cards and home equity lines of credit. If we have a client that’s carrying a credit card debt for X, Y, and Z reason, let’s take a look at that and possibly look at getting a game plan together to paying that off more quickly than expected because on the back end, those APR rates are going to surprise a lot of people.
Isaac Wright: Yeah. A lot of people because of the amount of money that’s been given out in our system and with COVID and people being able to work and the job market’s been good, people have a decent amount of money sitting in savings that’s being eaten up by inflation.
But what Ricky’s saying is if your interest rates on your debt go from 3%, 4% up to 7%, 8%, 9%, if you have double digit credit card interest rates, may very well mean that you want to take money from your savings and go ahead and pay these off. And it may even be more emphatic to do that now because your saving, even though inflation is up 8%, 9%, 10%. Your savings rate is still only at like 1%, maybe 2%. So, you just have to be mindful that if you can pay off high interest debt with money sitting in savings, that’s only at 1% or 2%. That’s putting money back in your pocket and that’s absolutely helping you combat inflation.
Now on the other end of the fence, expenses, variable rates, making sure that cost of living, that some of these things you can control. Let’s flip this over on income, especially for people nearing retirement. If they’ve already thought about retiring, do they necessarily have to stop that process?
In other words, you know, I would hate to tell somebody, “Hey, you’ve done all this work to retire, but now inflation’s taken that away from you.” Maybe in some respects, that could be the case, but in a lot of respects, maybe that’s not the case. So, from an income standpoint, what have you noticed out there as far as making sure people feel solid before they make any snap decisions?
Ricky Lafon: Yeah, I think we have to talk about getting back to expenses. What are you spending your money on? And then what kind of income sources are you going to have once you do retire, and do you have a retirement plan that coordinates those together? Could that mean moving up social security and taking that a little bit earlier? Do you have a pension plan? Do we need to create a pension plan? What forms of diversified income sources can we create from a person’s 401(k)? You know, a lot of people during their working years, they’re chasing that capital appreciation, they’re chasing gains in the market. And right now, that’s taken a hit.
Can we shift gears and reallocate those funds to start creating income so that as we move into retirement, we have that income stream and people can feel more comfortable and have that anxiety lifted off their shoulders?
Isaac Wright: Well, I think a good example that we can share with our listeners is that we have people that we work with that have nice dividends. They do have income that they pull from a combination of, whether it’s investments, insurance, accounts, products, and so forth. The main thing I want you to realize is this, even though maybe the market’s down 20%, 25%. You’re at a point where you’re only taking dividends and those dividends are likely going to stay fairly stable.
So again, sometimes people start looking at the stock market. Think all of us can be this way. We look at our account balance and maybe it’s down a lot more than we want. It’s on paper and you’re not necessarily pulling from the stocks themselves. You’re just taking the income from those stocks. No different than if you again, have an income from an annuity to help supplement your pensions.
If those are staying relatively in the same zone, I don’t think you have to change your retirement, but you know, all of us are hearing the negative news and sometimes that kind of permeates into your brain and you start thinking about it as maybe I can’t retire. I don’t know if that’s necessarily the case.
Ricky Lafon: Yeah. I love that example of dividends because what if a person is still working and they haven’t started taking those dividends yet? As we go through, let’s call it an uncomfortable market, those dividends are going back in and buying stocks while they’re on sale to build. That dividend stream in the future, or if a person’s taking dividends now, we’re not selling out of a position. We’re not cutting into principle. We have that income stream that can be flexible through time. And I think that’s the importance of working with an advisor and having a holistic retirement plan, of diversifying some income sources there and then making small tweaks, reactants to the market as it changes.
Isaac Wright: Well, we’re sitting here talking about whether you’ve retired or maybe you’re recently retired, but if you have a little time, tight now is a great opportunity to be able to have some of that money in the market. Maybe buying stocks that are on discount at 20% or 25% relative to where we were again, maybe six months ago.
Another thing real quick is this is, you know, the multiple in the stock market is down at a lower level than we’ve seen historically. In other words, it’s a favorable time based on historical numbers to get in. So, you know, we wanted to share some realistic news. I’m not calling this good news or bad news. I’m just saying that it’s a little bit more stable with some of the things that you see sometimes on the news themselves.
So, you know, and let’s bring that up real quick. You know, you and I have talked about annuities in the past. I know sometimes annuities get a bad rap, but right now we’ve seen a lot of people say, “Hey, listen, you know, with income and interest rates where they’re at today, maybe I do need to kind of carve out some of this money to be a little bit more protected for income reasons to help supplement my social security or supplement the fact that I may not want to work fully when I retire. You know, I would like to have something set aside that I can depend on.” And I think it wouldn’t surprise me with rates and interest rates going up that we’ll see people start thinking about annuities a little bit as far as an income option as well.
Ricky Lafon: Yeah, you’re exactly right. Incomes if set up properly and maintained properly can work wonderfully in a retirement plan. I’ve set up several over the past few weeks from people that either had a pension buyout or just a need for income. And we can even set those out where they can act as a hedge against inflation over time. Instead of having that static payout over time, it can actually increase very similar to social security over time, depending on how the product performs. And that’s a great way to increase income for future years for maybe health expenditures or maybe just go on more vacations.
Isaac Wright: Yeah. As time goes by, one thing I wanted you all to listen to was what Ricky just said is inflation adjusted income. There are plans out there that will allow you to have an increasing income as you get older. To help combat some of the things that we’re noticing here over the summer. We’ve talked about dividends. We’re talking about income. We’re talking about whether or not, if somebody is retiring, if they need to take all this money out. And again, depending upon where it comes from, whether it’s dividends, if they had to outright sell some stock, that could be a little bit more painful.
But I’ve noticed Ricky, I think you would agree that for the most part, at least the families we serve, if we’re able to sit down with them, even though we’ve had a rise of cost pretty substantially with inflation, it’s not overwhelmingly changing their plan. But we’re noticing that more people are getting concerned with it so that’s why we wanted to bring this out to you guys today.
I hope this is a helpful show and maybe the last thing I want to talk about here, Ricky. When it comes to income expenses, you know, maybe it’s about using money from like a health savings account or maybe using money dependent upon if you need to take more distributions to make those ends meet, should you take it? If you have a Roth account versus an IRA?
The reason I bring this up, it’s really important for somebody right now to work with an advisor. You know, I’m not saying you have to run in and see us. We’re here to help, but please, for God’s sakes, talk to somebody that professionally understands what’s going to happen in the realm of being able to communicate properly with you and to outline what a plan will look like for you. Whether or not you retire in one year, five years, if you’re already retired. Again, the last thing you want to do is feel like you have to go back to work. But yet you want to have somebody be honest enough with you to be able to say, “Hey, listen, there are some changes that may need to happen.”
Ricky Lafon: Yeah, that’s exactly right. And you know, I want to get back to what you were just talking about with the health savings account. If you’re still working and you have that available to you and that comes with a qualifying health insurance plan, as a family, you can put $7,300 into that plan, pre-tax, and that’s going to roll over year to year free to use for qualified medical expenses. By the time you get to retirement, you could have a nice little nest egg built up that you can use for things like Medicare Part B premiums, a prescription plan, or once you’re 65, you can use it for any expenses, you just have to pay taxes on the money that’s in the HSA. So that’s going to be another planning tool I think that comes to the front of all financial planning here over the next 10, 15 years.
Isaac Wright: Yeah, I think, you know, between HSA and Roth IRAs and trying to diversify from a tax perspective, where you’re pulling money and a lot of you have heard some of this stuff offhandedly, or maybe have read some of this stuff offhandedly, but when it comes to your personal situation, just want you to know we’re here to help. We want to make sure that you’re already preparing if inflation continues. Maybe I’m hoping that things are going to start and should start settling down.
But this is a great way to kind of get a second opinion on where you stand and putting yourself in a better situation. Ricky, I want to thank you for being on here today. This was not a long-winded program, but we just wanted to kind of bring this out as a bullet point feature today because we’ve seen so many people have concerns around inflation. If you have those same concerns, reach out to us here at Financial Dynamics. Talk soon.
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Advisory services offered through J.W. Cole Advisors, Inc. (“JWCA”). Financial Dynamics & Associates, Inc. and JWCA are unaffiliated entities.