In this month’s edition of “Money Matters,” Scott talks about inflation and the best ways to be prepared for a rising cost of living.

Managing Your Finances During High Inflation

The information below details some of the issues you should consider during times of high inflation to help manage your finances (click images to enlarge).

Money Matters: Inflation Preparation Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He's taught retirement planning and wealth management strategies to hundreds of financial professionals, and he joins us now by phone. Welcome, Scott.

0:00:22.9 Scott Oeth: Good morning, CJ.

0:00:24.8 CJ: Good morning. Let's talk inflation. Been hearing more about that lately, and I wanna know why. What's driving that concern?

0:00:32.9 SO: Yeah, great question. This is a hot topic. Inflation, in very simple terms, is rising cost of goods and services. And it can mean that the dollars that you have saved now [will] buy less in the future. And one of the examples I like to use to get people thinking about this is, think back to how much a movie ticket and the bag of popcorn cost when you were a kid. Or you can ask your parents or your grandparents. And there's many examples like that. If we think back to what things cost in the past compared to now, and those are examples of inflation at work. And inflation's a very critical component in financial planning and people's financial future. Things like investment returns, tax rates, those seem to get more of the discussion recently, but inflation is right in there as a critical assumption. And this has really been a hot topic.

0:01:24.8 SO: It seems the stage is set for a period of higher inflation going forward. We have a lot of government stimulus money that's been pumped into the economy, the supply of dollars is greatly increased, and one of the classic definitions is too much money chasing too few goods and services and pushes prices up and everything. We have extremely low interest rates and there's very little incentive with those low interest rates to keep money parked in a bank and borrowing money to spend, it's less painful. So, all those things is like foot on the gas for the economy, not to mention excitement about being able to get out there, reopening and so it seems that inflation may be in the horizon. And just as recently as this past weekend, Warren Buffet with his famous Berkshire Hathaway annual meeting, made several comments about how they are seeing inflation, seeing inflation spike. Wall Street Journal this morning, I noticed the headline says, "Everything screams inflation."

0:02:28.4 CJ: Alright, so what's happened in the past when there's been high inflation?

0:02:32.5 SO: Well, there's some really shocking examples of what would be considered hyperinflation, and these are typically associated with unstable countries. They've been war-torn, lesser developed countries with unstable governments and prices rising in the thousands of percent each year. Germany in the early 1920s or more recently, Zimbabwe or Venezuela. And there's some stories from these times. One that comes to mind is, a fellow goes to a cafe in Germany and pays for his first cup of coffee because prices are rising so quickly that by the time he orders the second cup of coffee, the price is almost doubled.

0:03:13.2 SO: Or workers in factories can be paid in cash at lunch time. They go to the window of the factory and toss out the bundle of money to their spouse, so that person can go and buy groceries immediately before the prices went up, before the end of the day. But those are very tragic, extreme examples. In the United States in recent history, if we look at the late 1970s, very early 1980s, that's probably one of the most punishing periods of inflation in our recent history where we had double-digit inflation, so it was a hard time in the economy and prices were rising quickly. The problem is, so there's at large, what does this mean for the economy? What does this mean for employments and investment prices? I think the real concern is for individuals and people who are on a fixed income or have a fixed amount of savings. They can really get pinched over time. As the cost of living goes up, their purchasing power goes down.

0:04:14.0 CJ: So what are some steps that people could take to prepare or protect themselves from inflation?

0:04:20.4 SO: Yeah, so the meat of it. What can you do? What can we can control or at least try to control or position ourselves for a period of higher inflation, if it does come? First of all, if you have a job, that's a good thing during a period of high inflation, in particular if it's a job with some type of inflationary adjustment kinda built into your type of career or the potential for upside earnings or bonuses, because employment is usually fairly inflation-adjusted, your earnings go up with the cost of living. So you might wanna really consider where you're at career-wise, if you can smartly invest in education, skills training. If you can successfully launch some type of business that would give you some type of hedge against inflation. Those might be things to consider. The other side of that is you can somewhat inoculate yourself from inflation if you can control your need for spending. We all like nice things. We like to live a nice lifestyle and treat ourselves, but if you are not as dependent on future spending, well then you're somewhat insulated from prices going up. Easier said than done, for sure.

0:05:30.3 CJ: Yeah. So how long do these periods of inflation usually last? So if it's right around the corner, should people who are thinking about retirement, put it off for a bit?

0:05:42.8 SO: Well, happily, in the US, some inflation is generally thought to be a sign of a fairly healthy economy. It actually helps them move and grow, and one big countervailing force that we've had is the rise of technology that's made so many things cheaper and easier and that's kind of pushed down inflation for a long time. Since the financial crisis, there's been the thought that we're gonna have higher inflation, but it's been so low in the United States for a long period of time, and I just think that productivity and technology has been a big part of that, but the big problem, CJ, is, I remember reading a retirement distribution study earlier in my career, and this really jumped out at me.

0:06:25.0 SO: A lot of folks are worried about stock market crashes and their retirement savings, and what happens if my portfolio goes down. And what we know, if we look at market history, is if people are diversified, if they stick with the game plan, the investments have always come back over time, usually within a matter of a few years they get back to their high level, and you just need to sort of bridge over those down periods. The problem with periods of high inflation is, the prices go up, they don't come back down, and so you have, even if inflation cools off in a few years, it would send a spike into double-digit inflation for a period of a few years, you're set with that higher level of spending for the rest of your life. It's been very, very rare that we've had deflation where prices come back down, really just the Great Depression.

0:07:10.5 SO: So thinking about trying to... Did you say delay retirement? That might make sense. Delaying Social Security. This is a complex decision. I definitely advocate getting a good expert advice, but Social Security payments and retirement are inflation-indexed and you might really wanna consider working a bit longer, letting your Social Security build up before you draw on that, because every extra little bit you let that payment build up will be inflation-adjusted going forward. And then there's just some investments, stocks in your retirement portfolio or in your long-term savings. It's not that they're specifically correlated to spikes in inflation, but just the high earning power of stocks that they've generated over the long haul, historically helps you maintain your purchasing power, even run well ahead of inflation historically, and maintains that purchasing power. And there's other investments people tend to think of, things like real estate. If you're renting, well, your rent may just keep going up, and that's something you have to deal with. If you own your home, there again, you're somewhat protected.

0:08:19.6 SO: I guess maybe a few other things to throw out there. Savings in the bank is usually thought of as a very good thing. I advocate people having a good safe cash cushion in the bank, but if those dollars are sitting their long-term, you're earning essentially very little interest right now. Essentially zero. And if your costs of living are going up at a high rate, those dollars become worth less and less effectively sitting there in the bank. So you want to be smart and you want to have yourself an emergency cushion, but directing more toward longer-term investments as much as you can stomach or reasonably do so, that may make sense. The US Treasury issues what they call I-bonds. These are savings bonds, they're not tradable investments. They're backed by the US Treasury, but the "I" stands for inflation. So they're inflation-adjusted savings bonds. That might be something that folks want to consider for a part of their savings. There are some time restrictions, so read into that carefully. One kind of simple thing that, if you look back to that early '80s period when we were going through high inflation that a lot of folks advocated as they were dealing with it then, is looking at the things that you use in your house day-to-day and buying ahead on those.

0:09:34.7 SO: So whether it's canned goods, cleaning supplies, batteries, if there are items that you know that you'll be using and you need to live in the future, and they're durable goods that can be stored and they're not going to go out of style, or you're not at risk of them being stolen or things like that, it could really make sense to go ahead and buy them, buy them in bulk, buy them when you see them on sale, stockpile. And that's another form of savings. You know, you know you're gonna... You would need to spend money on them in the future, and while your bank savings right now is well below 1% interest, if you have cans of tuna sitting there that you might be eating in the future and the price of those cans of tuna go up by 5% or 10% over the next couple of years, you've effectively earned a pretty nice return on your pantry there. So those are some of the more simple ways. Gold and precious metals often get thrown out as inflation hedges and they have done well. Often in periods of high inflation, but I urge caution here, too. Seek your expert advice, really do your research, and I advocate an all-weather portfolio that's looking at multiple risks in the market, because there are many. And there are many, many opportunities as well. And if folks were to go 100% all into something like precious metals, it might do well in a short period of time, it might not. There's just far less certainty than a really well-diversified portfolio.

0:10:58.1 CJ: Okay. Now there must be a group of people out there that benefit with higher inflation. Who would that be?

0:11:06.3 SO: Well, typically, if people own businesses, and they have the ability to raise their prices with the inflating economy that can help some businesses. It can also really hurt others, especially if they need to borrow because typically higher interest rates come along with inflation as well. Real estate investors have tended to do well during periods of high inflation. People who have good earnings power, they can do well during periods of inflation, or I shouldn't even say high, but just a job where inflation is considered in your earnings and it can move upward. And I say in a very mainstream, very, very broad-based level, investing in retirement accounts, individual retirement accounts, in a brokerage account, in stock investments, in mutual funds, in exchange-traded funds. I certainly want to be smart about this and thoughtful and get good help, but that's accessible to basically everyone at this point. There's very, very low cost. It's very accessible, and that's a way that anyone can start building their long-term hedge against inflation.

0:12:21.3 CJ: Well, we're talking with Scott Oeth, and we'll be talking finances with Scott on the first Wednesday of the month on North Shore Morning going forward. Is there anything you'd like to add, Scott?

0:12:30.8 SO: I really enjoyed the conversation, CJ. And I'd just point out that we have you... WTIP is archiving all these conversations at your site. I also post them to my blog, scottoeth.com. I really encourage people to seek out good advice, look for a certified financial planner, and I've had some fun fielding questions from these calls. So feel free to send me an email, call. Happy to talk over these things we're talking about here.

0:12:56.1 CJ: Awesome. Thank you so much. We'll check in again next month.

0:12:58.8 SO: Thanks, CJ.