Inflation & Bucket-Based Retirement Planning
Joe Grochowski and Tom Lyons talk about inflation and bucket-based retirement planning.
Transcript from Today’s Business Radio interview with Joe Grochowski.
Tom:
We haven't seen inflation at these levels for forty-plus years. What goes into calculating consumer-based inflation?
Joe:
That's right Tom. Year over year, inflation is roughly double the average. Investors watch the consumer price index or CPI to gauge the rate of price change for everyday goods and services. Energy, Shelter, and groceries are some of the items in the index.
Looking back to the 1950s we find that the inflation rate has averaged 3.51% per year. With inflation now at multi-decade highs, consumers and investors are presented with new challenges.
Tom:
How can retirees protect their purchasing power against inflation?
Joe:
Economists describe inflation as "too many dollars chasing too few goods or services." Assets with limited or fixed supply often hold up well during inflationary environments. For example, owning a diversified portfolio containing assets like stocks, real estate, and commodities has historically helped a portfolio keep pace with inflation.
Tom:
You mentioned owning a diversified portfolio, why is that important?
Joe:
At Vector Wealth Management, we believe that people in or near retirement should employ a bucket-based retirement plan. Using this approach, a portfolio is segmented into buckets based on various time horizons. Each bucket has an expected horizon for when the assets will be consumed over the course of retirement. The buckets are then uniquely invested in a mixture of asset classes.
The important takeaway here is that segments are matched to expected future spending. The way you and I spend is likely different, and one’s investment portfolio and future planning should take the differences into consideration.
Tom:
To protect one’s purchasing power against elevated inflation, like we see today; a retiree should consider a diversified portfolio across time and asset types using a bucket-based retirement plan.
Joe:
Inflation is commonly measured at a national level; however, each person's experience of inflation is personal. So whether you are traveling, buying a vehicle or saving for a home, your inflation mix and experience will be unique. It's important to find a trusted financial advisor to help make a plan specific for how you will live your life.
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