What is inflation and 3 Ways to Combat it

Troy Sharpe:  What is inflation, how does it impact your retirement income, and what are three ways that you could combat inflation to maintain the purchasing power of your retirement income?

Troy: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) ,  and host of the Retirement Income Show.

Inflation is what we call a silent killer. What inflation does is, it erodes your purchasing power over time.  If you have $5,000 of retirement income today, each year, as time goes on, that $5,000 is able to buy less and less. And if we  look at over a 20-year period with the historical inflation rate of about 3% to 3.5% in this country, about every 20 years, your purchasing power will be cut  in half. So, if you need $50,000 today for retirement income purposes, in 20 years, you’re going to need $100,000 per year, just to buy the same goods  and services you can today at $50,000.

So inflation is, really, what we call a silent killer. It erodes your purchasing power. It is a real thing. It happens slowly.  Think back to when you were a kid. How much did it cost to go to a movie? How much did it cost to buy a car or your first house? Inflation is real and we have to accept this and we have to  understand it, and we have to bake into our retirement planning strategies that will help combat inflation.  One thing before I get into the three ways to combat inflation, I want you to pay special attention to the inflation in the medical arena. Because in retirement, this is the area where most people are going to be bit the hardest because  medical costs are increasing at a greater rate than the traditional rate of inflation in this country.

In the 2018 Medicare trustees report, they came out and said  that Medicare Part B premiums are expected to increase 8% per year over the next 5 years. So inflation in the general economy right now is  around 2%. That’s the Federal Reserve’s target and we’re right at that level, but expenses in the medical arena are skyrocketing way above and beyond that 2%  level. We have to be anticipating 5%, 7%, 8% inflation possibly in medical costs and that’s where as we get older and older, a larger part of our budget  is going to be dedicated to.

Understand inflation is real and we need to plan for it in order to have increasing income so we maintain the purchasing power of our  retirement income. Now, how do you combat inflation? How do you embed strategies into your retirement plan that can help you have increasing income and help you combat inflation so you maintain  your purchasing power? Well, number one, consider deferring your social security as long as possible. So if you take social security at 62, it’s a 25% reduction  from your full retirement age. If you can wait beyond your full retirement age to age 70, your social security income will increase 8% per year  until age 70, which guarantees you more lifetime income from social security.

Now, additionally, social security provides a cost of living adjustment. So, let’s say,  it averages 2% a year increase. Well, if you have a much higher income as opposed to taking it earlier, 2% cost of living adjustment on $3,000 per month is a higher increase than 2% on $2,000. So 2% on $3,000  is going to go up $60, 2% on $2,000  is going to go up $40. So not only by deferring to get more monthly income, but the cost of living adjustments you’ll receive throughout retirement will give you more income in your pocket as well.

Number two, consider investing in a portfolio of what we call dividend growth stocks. Now, dividends are not guaranteed. Investing in the market involves risk, including the possible loss of principal.  Dividend growth is not guaranteed. So now that I’ve got disclosures out of the way, dividend growth stocks are companies that have a long track record of paying you  not only a dividend, which is a share of their profits, but they have a long track record of increasing that dividend payment every single year.

Some companies have increased their dividend payments,  which means an increasing income for you for more than 25 consecutive years. These companies are called dividend aristocrats. Some companies have increased their dividend payments  for 40, 50, 60, 70 years. So you want to make sure you do your research, you understand what you’re doing. Don’t just go out and buy a bunch of dividend stocks without professional advice or working with someone to help  you do this that does it for a living but understand that dividend growth stocks, a lot of companies out there have a long track record of not only paying you a dividend every single year  but increasing that dividend payment to help you have increasing income in retirement.

The third way to combat inflation is to consider a deferred income annuity for your retirement.  Now, you can take a portion of your money and buy one of these deferred income annuities, or in a more strategic fashion, we could take a portion of our money and maybe buy  one, two, or three of them. And the concept there is to stack them. When you’re stacking deferred income annuities, let’s say, you have $1 million and you take $300,000 and you dedicate it  to a stacking strategy for deferred income annuities. What’s going to happen is, generally speaking, you’re going to want to let them all three defer and you plan on taking income  from the first one maybe in six years, seven years, or eight years.

Let’s say, that’s going to give you $10,000 per year. Now, the second one continues to grow beyond that and you plan on activating that one  in maybe 12, 13, 14 years. That one, let’s say, is going to give you $15,000, $16,000 per year. And then the third one, you plan on deferring for maybe 20 years. You’re going to activate  that one down the road, so you stacked all three. Now, you have an increasing income stream from these deferred income annuities while only taking a portion of your overall  assets and dedicating it to increasing income. Those are three strategies to consider to combat inflation. They’re not the only three strategies, but those are three  good ones. And the goal here is to help get you more connected to your money so you can make more informed decisions and position yourself for a more secure retirement.

If you like this video, make  sure to share it with a friend or a family member, maybe you work with somebody who’s getting close to retirement. We all need to combat inflation because it’s real. So the more people we can help learn  and make informed decisions about their retirement, the better we’ll all be. Make sure to hit the subscribe button down below and then hit that little bell icon so you’ll be notified whenever we upload a new content. And, of course, hit the  thumbs up button which likes the video and lets other YouTube users know that combating inflation is serious in retirement and this is a good video for them to watch.