May 13, 2020
This week, I’m sharing with you several types of stress tests that you should run on your retirement portfolio. Just like a stress test in the cardiologist’s office, a controlled test on your retirement portfolio helps you see the potential holes in your plan and address them before they lead to major issues down the road.
Today, I’m talking about one of the most important stress tests you should run on your retirement: higher inflation. We’ve all been lulled into complacency about inflation. If you’re younger than 45-50, you probably don’t remember first-hand the damage that high inflation can do to your cost of living. Imagine paying a mortgage on your home where the interest rate was 16%! If you bought a house in 1981, that was the average rate on a 30 year fixed mortgage that year.
But let’s not kid ourselves, inflation is not a thing of the past. It’s a very real and continuous threat that any conscientious person planning for their retirement would be well-advised to seriously consider the risks of higher inflation.
With higher inflation, the cost of everything goes up - food, gas, housing, travel, clothing - everything. And when you’re living on a fixed income in retirement, that becomes a problem, because you would either have to cut back your lifestyle and spending or withdraw more from your investments, which your portfolio may not be able to maintain for the long-haul.
Inflation is also a double-edged sword because in addition to your cost of living going up, your portfolio takes a hit as well. Retirees tend to have more of their money invested in bonds and cash, which after inflation, net you lower returns. So you have increased expenses in conjunction with a portfolio that’s producing lower returns in real dollars.
So a good place to start is to stress test reasonable levels of inflation, not wild Venezuela-style, 53 million percent increase in inflation. But if your cost of living was going up 4 or 5% a year for 5-10 years or more, can your investment portfolio in retirement keep up with the higher cost of living without you putting yourself at risk of running out of money?
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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