Retirement

Retiring in a High Inflation Environment

By Dean Barber

May 20, 2021

Retiring in a High Inflation Environment


Key Points – Retiring in a High Inflation Environment:

  • Two Main Wealth Eroders
  • The Threat of Looming Inflation
  • Inflation Scenarios
  • 21 minute read | 39 minutes to listen

The headlines are everywhere, inflation is rearing its ugly head again! Join Dean Barber and Bud Kasper as they tackle the subject: Retiring in a High Inflation Environment. You should understand how this high inflation environment affects your ability to retire and stay retired and do it with dignity and peace of mind.

Complimentary Consultation

Article: Should I Buy Gold?

Article: What Should I Invest My Money In?


Retiring in a High Inflation Environment

Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. And Bud, there’s a lot of crazy news out there today, and the question is, is it going to be true? We’ll get to what that is here in just a second, but I wanted to tease with that right upfront.

Two Main Wealth Eroders

In the combined years that you and I have been doing financial planning for people, especially those near retirement and in retirement, we know there are two main wealth eroders that you have virtually no control over. All right? You can assert some control, but taxes and inflation are those two.

We’ve talked an awful lot about taxes and how to properly plan taxes and create multi-year, forward-looking tax strategies to reduce the amount of money that goes off to the government. Still, we have no control over what a new administration might do with tax rates, what they might do with capital gains rates, et cetera.

We can plan around those things, and we can pay as little as possible, but we don’t control what happens in Washington any more than our votes, right? 

Inflation is the Silent Killer

Now, inflation, on the other side, we call that the silent killer in retirement.

Bud Kasper: Sure do.

Dean Barber: You and I have talked a lot over the years in kind of small soundbites about how if you don’t have the proper inflation assumption within your plan, and that’s assuming that you have a plan, right?

Bud Kasper: Glad you said that.

Dean Barber: But if you don’t have that proper inflation assumption in there, it can give you a false sense of security. You can’t turn on the news. You can’t open up any website that is financial in nature without the in-your-face inflation is here. It’s going to be bad. You’re getting varying opinions. Fed says inflation is to spike sometime this summer.

The Threat of Looming Inflation

It’ll begin to tail off. We’re seeing a large number now because we’re coming out of COVID. And the truth is, we don’t really know. I can tell you this, in the housing sector right now, inflation is very real.

Bud Kasper: Oh, very real. Materials and others.

Dean Barber: Materials, yep. The question is, how long does that last? And what’s the impact of that on someone’s ability to get to retirement and then get through retirement if we truly go to an inflationary time as we had back in the late ’70s and early ’80s?

Bud Kasper: Well, the good thing, Dean, is we can prepare for it. The way we do that, and I’ve told this story many times. Rarely, and I mean rarely, with the people I have the privilege to meet and tell what our story’s about, and exactly how vital planning is and tax control, et cetera, et cetera, is; what are the assumptions you’re using in that plan?

Planning for Inflation

If we’re using our typical today assumption, we use 3.88%. Now, is that where inflation is? The answer is no. Okay? So if that’s the case, why do that? Because we put more pressure on the plan. But if a client comes in and says, “I’m really worried about inflation. I think this is going to get worse.” And by the way, if you look at healthcare, we use 6.8% on that inflation factor per year.

This is a way that you can technically, within a comprehensive financial plan, make the assumption adjustments in the plan to reflect higher inflation to see whether or not your plan is going to work or not. 

No way possible that you’re going to have a person come in and say, “Well, I’ve got your inflation under control. We’re going to put some money in gold, put some money into real estate, and put some money in TIPS (treasury inflation protection securities), and we’ll be just fine.” 

Sorry, that isn’t going to cut it because there are too many variables that change those values.

Dean Barber: Yeah, no, there’s zero question about that, Bud. 

More Reading Material

By the way, we have two excellent articles involving inflation and investing, both written by one of the partners here at Barber Financial Group, Shane Barber. One is Should I Buy Gold? and the other is What Should I Invest My Money In?

Both will tell the story of what Bud and I will try to convey through radio here today.

Bud Kasper: I’m going to add something as well. Shane is an incredible writer. He writes so that you can understand the premise he’s working off for the article and has a wonderful sense of humor as well. Here you go, folks; here’s the opportunity for you to read these papers at no charge or obligation.

Get out there and read those pieces.

A Quick Inflation Quiz

Dean Barber: Yes, that’s right. It’s all about education. But let’s go back. I’m going to do a little quiz here. I got some numbers up in front of me. In 1974, how old were you then?

Bud Kasper: I would have been 21.

Dean Barber: All right. So old enough to know better. What was the inflation rate in 1974?

Bud Kasper: At that time, it was high; I’m going to say 9%?

Dean Barber: You’re close. 11.04% was the inflation rate in 1974, followed by 9.13%, followed by 5.76%, followed by 6.5%, followed by 7.5%, followed by 11.5, 13.5%, and 10.5%. It wasn’t until 1983 that inflation dropped below 4% for the first time in 15 years. Is it possible we can have a high inflationary period? It’s possible.

With the money supply that’s out there today, all we need is money velocity to begin to tick up. And if you don’t know what that’s going to do to your ability to have the lifestyle you want in retirement, you’ve got to get a plan.

Bud Kasper: The silent killer.

Dean Barber: If it’s not done right, man, your retirement won’t look anything like what you want it to. I want to encourage people, Bud, really quick, to read those articles.

Bud, what we want to do is talk about how you should build these assumptions into your plan and why it’s so critical to the success of your retirement, especially if indeed we are headed into a high inflationary environment.

A Quick Example of 1% Inflation

I will give a quick example of what just a 1% change in the inflation rate can do to the probability of success in a plan. Now set the stage here, Bud, because the program that I have open right now is a program that uses something called a Monte Carlo simulation.

Monte Carlo Simulation

So for lack of a better way to understand that the Monte Carlo simulation is basically going to take all of the historical data, it’s going to randomize it, and it’s going to create 10,000 trials. So it’s going to create 10,000 lifetimes of randomizing these numbers so that you can see the probability of success.

It’s taking historical data from the markets and inflation from fixed income to equity, depending upon your asset allocation, et cetera. So we have two scenarios built out here, and the first scenario assumes a 4% inflation rate. And with a 4% inflation rate, which is, by the way, pretty standard for what we use.

Bud Kasper: Specific to our firm.

The Importance of 4%

Dean Barber: Correct. Because we would rather, even though inflation hasn’t been running at 4% in the last several years, we know that the long-term average is closer to four, yet we see people who want a second opinion; they want that complimentary consultation. The few that have a plan put together, you and I have seen over the last several years, most of them are using inflation rates around 2%.

Bud Kasper: Yeah. And you almost have to ask yourself the question, why would you do that? Why would a person come in and represent a 2% inflation rate?

Dean Barber: Well, because, Bud, if you look at the last decade, you’re pretty close to that, right?

Bud Kasper: Well, yeah, but it also gives you a favorable number rather than a difficult number.

Dean Barber: I understand, but that’s what a lot of the industry is doing.

Bud Kasper: Yeah.

Dean Barber: Okay? That’s just what’s happening out there. And here’s where I think it gets scary. 

So with a 4% inflation rate, the way this plan was built out with the assumptions, this couple had a 95% probability of achieving their goals and keeping up with a 4% inflation rate. By the way, we also apply the 6.5% rate in this particular plan to healthcare.

Why 6.5% for Healthcare Inflation?

Healthcare costs, we know, are going up much more rapidly than the core rate of inflation. So that’s a 95% probability of success. Suppose we change just one variable. And that is the rate of inflation. And all we do is increase that rate of inflation by 1%. So, in other words, we’re going to go from 4% to 5%. The probability of success reduces from 95% down to 82%.

Bud Kasper: Wow.

Dean Barber: We go up to 1.5%, we’re going to get into the danger zone, Bud, where it’s just not going to work.

From 1974 to 1981, the best inflation rate was 5.76%, but there were multiple times when it was in the double digits. 

So is it possible that we go into an inflationary environment as we had in the late seventies and early eighties? And we always have to say, “Yes, anything is possible.”

Bud Kasper: Right.

What Inflations Rates Does Your Plan Assume?

Dean Barber: But, what inflation have you assumed on your financial plan? Again, assuming that you have a financial plan done, an actual financial plan. Not some Excel spreadsheet because that is not a financial plan. 

There are way too many variables to come in there. Not that Excel spreadsheets in some areas of the plan can’t dig in and give us a deeper answer, but that’s not how you do it.

Investment Solutions for Inflationary Trends

Bud Kasper: It’s not how you do it. More importantly, is the fact that people look for investment solutions to counter inflationary trends.

Dean Barber: Right.

Bud Kasper: Is that the right way? Well, the problem is it’s variable. You really can’t just say, “I’m going to hug this one the most because it’s probably going to be able to save me in a higher inflationary environment.”

A Historical Test

Dean Barber: But one of the things we do is something called a historical test, okay? So when we go back and do a historical test, we can do a historical test through those periods, right? So that we can see what inflation was.

Then we can adjust and tweak portfolios or build portfolios for those same years and say, “Okay, in those environments, when we had the high inflation environment, what was the ideal portfolio? What gave us the best rate of return to combat those crazy inflation numbers?” 

Because for a plan to work, especially in retirement and in the distribution phase, if we’re taking out four or 5% a year, we have to take that four or 5%, and then we have to make that much above inflation to keep our same purchasing power.

Bud Kasper: Right. You need that critical test because if you’re not, you’re putting more pressure on the plan, and the results don’t turn out how the client is anticipating, then we haven’t done our job.

Dean Barber: Right. Even if you have an inflation rate of 4% and you got a distribution rate of 5%, you have to make 9% every year to maintain your purchasing power, to have your standard of living stay the same.

Bud Kasper: Yet advisors too often say, “Well, we’re going to tweak the portfolio. We’re going to put in some REITs, and that’ll take care of that inflation factor for you.”

“History doesn’t repeat itself, but it often rhymes.”

Dean Barber: Well, what you want to know is really how did it happen? Now again, you use this Mark Twain analogy a lot, “History doesn’t repeat itself, but it often rhymes.” right? 

So why would you not want to go back and do a historical test of the different asset classes through those high inflationary times and see which one of these asset allocations gives you the highest probability from a historical perspective of combating inflation?

Bud, this inflation thing should be alarming to everyone. So make sure and read the articles that we got out there by my brother, Shane. He’s one of the partners here.

Bud Kasper: And quite frankly, even though I hate inflation, sometimes you need a wake-up call because that’s part of what economies do from time to time. So here we’ve been singing a wonderful song because we’ve had a fed funds rate at 2% on target and keeping money flow, which is unbelievably significant. 

So the question is, “What’s the impact overall going to be?” Well, any of us that have any time in this business know that this inflationary thing, as you said earlier, is a silent killer. If you’re not preparing for this, if you’re not testing your portfolio for this type of event, you’re doing yourself a disservice.

You have a chance, we’re giving you that chance, and we’re talking about it from an educational perspective, folks. And I think you’ll see value in the papers that we’ve written on the subject.

So Many Variables

Dean Barber: Right. There are a lot of variables that are coming at us at lightning speed right now. It’s not just inflation. We’ve got multiple new proposals coming out from the Biden administration on tax policy and corporate governance, or call it regulations.

So these things are all coming at us, and they cause us to react based on either fear or greed, and very seldom do people act out of logic. They don’t act out of logic because they lack the context without clarity and a plan.

Bud Kasper: Yeah.

Dean Barber: Then you throw these variables into the planning, say, “Okay. How did that impact me? What’s that do to my probability of success of being able to do all the things that I want to do and achieve my goals; short, intermediate, and long-term goals?” 

Now, what adjustments should be made from a logical perspective? Not a knee-jerk reaction, not something that’s coming off the headlines of CNBC or Bloomberg. It is something factual that you know can help you in your situation.

Bud Kasper: Yeah. The linchpin on this will be two-fold, and it’s going to be the federal reserve, and it’s going to be Congress. With these plans presented to us right now, what will the impact be on our financial plans?

Dean Barber: Yeah. The first thing you got to do is you’ve got to have a plan, right?

Bud Kasper: Yeah, right.

The Guided Retirement System™

Dean Barber: This is why we created the Guided Retirement System™, a proprietary system designed to look at every aspect of a person’s financial life as they near and begin retirement to get through retirement with all the hopes and dreams that they have.

Bud Kasper: For you who are just working with investment advisors who aren’t giving you planning direction, this will be a critical time for you.

Dean Barber: Well, you’ll be amazed at what you see. And we call it investing for a purpose, Bud, because you don’t just invest to see how big you can get that portfolio to be unless you’re just greedy. And that’s probably not a very good spot to be in.

Bud Kasper: Right, not for retirees.

Another Inflation Scenario

Dean Barber: I want to play around with this inflation thing a little bit more. 

The first scenario that I laid out was a scenario that was 40% equity, 60% fixed income, taking us through those timeframes of the mid to late 70s and into the early 80s.

I want to give our readers some perspective about what a 40/60 portfolio would do versus a 60/40 portfolio. So you reverse it, right?

Bud Kasper: Right.

Dean Barber: In 1973 and 1974, we had 6.2% and 11.04% inflation rates. A 60/40 portfolio lost 10.5%, and lost 15.9%, respectively. Your real return was a -17% and a -27%. 

So, in those two years, 44% of your purchasing power was eroded, and only a portion of it was attributable to the actual returns in the portfolio. Another portion of it, a large portion of it, was attributable to inflation.

What About a 40/60 Portfolio? 

Now in those high inflation eras, we also can go back with that 40/60 portfolio. Now we only got 40% equity, 60% fixed income. Well, our actual returns were -9% and -16%. Why? Because bonds in that environment still provided a superior safety net than what stocks did.

Bud Kasper: Right, and the question is, “Is there anything else?”. As you mentioned earlier, one of the firm’s partners, Shane Barber, wrote this article Should I buy gold? I love this part in the third paragraph, where he said he Googled gold and got 3,650,000 results, and he got it in 1.22 seconds.

Dean Barber: Just asking the question, “Should I buy gold?” right?

Bud Kasper: “Let’s see, which one do I want to read first?” 

Comparing Now to The Great Recession

Dean Barber: It reminds me, Bud, of the mania of what we saw happening just before the great recession, right? You couldn’t turn on the radio or the television without seeing an ad that says, “Hey, if you own a home and you’ve got $5,000 worth of equity, we’ll loan you $50,000.” 

Now that may be a little bit exaggerated, but “We’ll loan you up to 120% of the value of your home, no questions asked, just come in as long as you’ve got a pulse and you can sign your name, we’ll, we’ll give you the money.”

Diving Back into The Big Short

Bud Kasper: Oh my gosh, you know what I did? A couple of weeks ago, I just had to pull it up, the movie The Big Short.

Dean Barber: Oh, yeah.

Bud Kasper: It talked about the mortgage crisis that we were in at that time. At one point, they talk to a bartender or waitress, and she owned five homes! She was upside down, she’s renting them out, and they can’t make the payments. I mean, it was a horrible situation, unbelievable at that time. 

By the way, if I might add as well, Michael Burry is who The Big Short focused on because he was shorting it at the time. 

Shorting means that you win when things go down. Burry was shorting real estate at that time, and he made a fortune off of that. Just this week, he said he’s going to short Tesla for half a billion dollars! So God knows what’s going to bring up next, but what a fascinating world we live in.

Dean Barber: Well, if you remember, he was about 18 months early on the shorting.

Bud Kasper: Oh yeah, and remember the market would never fall, wouldn’t fall, wouldn’t fall just going crazy when he knew it had to, right?

Follow the Fundamentals

Dean Barber: Right, well, all of the fundamentals said so. 

You and I both know Bud that often we get into a market where the fundamentals can just get thrown out the window because they don’t seem to matter. 

The Fed is Involved? Bye Bye Fundamentals

Anytime you have a massive Fed intervention, the fundamentals seem to go away because markets like that liquidity. One of the things that are happening right now is that every time somebody talks about a higher inflation rate, everybody’s worried about the yield on the 10-Year Treasury rising. Just imagine if the yield on the 10-Year Treasury were to exceed the average yield on the S&P 500. What does that do?

Dean Barber: Then it says, “Well, I can get out there.” But look at this, so the 10-Year Treasury as we speak is 1.64%. 1.64%, which’s lower than the yield on the S&P 500.

Bud Kasper: Right, and what’s the client supposed to be able to do? “Where am I going to get my return from that inflation is taking away my purchasing power?”

Dean Barber: Well, if you’re only going to get 1.64% and we have inflation running year over year at 4.1%, then you just eroded your purchasing power by 2.3% in a year. That’s like losing money. That’s what we’re talking about here, and if you don’t have the right inflationary factor built into your plan, you’re going to be in for a rude awakening in the future. 

Don’t look at what’s happening with inflation and the news on inflation. Don’t get an idea of, “Oh my God, I’ve got to change my investment strategy.” 

Start with a Proper Financial Plan

The first thing you have to do is to get a properly constructed financial plan. Then build that plan and run the assumptions at higher inflation rates to see, “How does that impact your ability to do the things you want to do? Are you going to have to make sacrifices? Are there things you’re going to have to forego? Or is that a high inflationary environment? Are we able to tackle that through the proper asset allocation?”

You can’t decide the proper asset allocation until you first factor in those higher inflation rates.

Bud Kasper: You’re so right. What people fear the most is loss of control. The planning can help you control that, at least understand it and define it. Through making some adjustments inside of that, because we have a history as our ally here, we should be able to come up with a solution that would be satisfactory.

Dean Barber: Oh, 100% agree with you, Bud. 

Double-Digit Inflation Hasn’t Been Around Since the ’80s

Today, we’re talking about retiring in a high-inflation environment. And Bud, this is a subject that you and I have not had to tackle because remember when inflation finally started to drop from those double-digit numbers was 1983. That was your first year in the industry. My first year in the industry was 1987. 

So we haven’t had to deal with a high inflationary environment. Now, what we have done is we have gone back and educated ourselves as to the effects of inflation on one’s purchasing power. We have educated ourselves as to which asset classes tend to perform best during inflationary environments.

I think the biggest issue that is out there today is that people are going to be asking the question, “Well, what should I invest my money in now? If inflation is coming back, should I buy gold?” And guess what? We happen to have two great articles on both of those subjects. 

And you can read those articles, What Should I Invest My Money In? and Should I Buy Gold? 

Siegel on Inflation

So, earlier this week, Bud, I think it was on Monday, Jeremy Siegel, a professor of finance at Wharton, was on CNBC, and he talked about inflation. If anybody missed it, we can give a quick synopsis of what Siegel says. 

Bud Kasper: He’s the economics professor at Wharton, part of the University of Pennsylvania.

Dean Barber: Exactly. He’s a smart dude. Coming out of the financial crisis in 2009 and 10, with all the printing of money, QE1, QE2, and the operation twist, Siegel was like, “You have to buy stocks.”

Bud Kasper: Yes, stocks for the long run.

Dean Barber: Stocks for the long run, right. 

Now, what he’s saying today is that, yes, there is no question that stocks are overvalued, but he does believe that we are in an environment and that we will stay in that inflationary environment for some time. He thinks all we need is the velocity of money to pick up with the money supply that’s out there today, and we could see very real inflation that we haven’t seen in three decades, Bud. 

So, he says that in that environment, equities should do well and would be far better suited than fixed income or cash. Because if we do get into that high inflationary environment, fixed income and cash, we’re almost guaranteed to lose purchasing power.

Warren Buffett on Fear

Bud Kasper: Yeah, exactly right. And that’s a fearful thing, so people need to be kind of prepared for that. You know, I like how in Should I Buy Gold? that Shane referenced Warren Buffett. I had a distinct pleasure, and I mean that in all sincerity, to meet Warren Buffett, and what a prince of a guy, I mean, he couldn’t have been nicer. 

He was so genuine, I will say, but I’ve got a quote inside this article, and folks, you can get this right off our website, “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you have to hope people become more afraid in a year or two years than they are now. If they become more afraid, you make more money. If they become less afraid, you lose money, but the gold itself doesn’t produce anything.”

That’s been his take. Gold doesn’t pay a dividend, it doesn’t pay any interest rate, and it’s purely a fear asset. 

Also, inside the article, Shane points out that we’re all inundated with these commercials on buy gold, buy gold. They found 50 million 50 cent pieces that are gold now that they didn’t have before. Now you can buy it from it. But the message is the same whether or not inflation is going up or going down. Sometimes have to ask the question, “Who’s profiting from this type of fear-mongering system?”

Differences in Types of Gold Investments

Dean Barber: Well, so look, Bud, in 2008, amid the financial crisis, we had a position in our portfolios that was gold, right? Today, you can get the impact of what gold does in these fear environments by buying ETFs that trade like gold. They’re liquid so that you can sell them any time, any day, right. By the way, if you’ve got gold and you got a gold bar, right. How are you going to spend that money?

Bud Kasper: Right. We always say you’re buying groceries. You have to go over there and take a knife and skin off enough gold to pay for your groceries. Well, that sounds practical. Practical is Bitcoin.

Dean Barber: Yeah. But, you can have the effects in your portfolio of what gold can do. By adding that too, and some of the tactical portfolios that we run today, we have a small gold percentage. And, that percentage could increase if the fear out there continues.

Bud Kasper:  And, I want people to understand that there’s a difference between owning gold, the commodity, versus mining stocks because mining stocks that mine for gold have a different characteristic than gold itself. You’re talking about a person’s running a business.

Dean Barber: Right.

Bud Kasper: You know, and there can be some business flaws that don’t necessarily measure up to what gold itself is doing as a commodity.

Making the Proper Inflation Assumptions in the Plan

Dean Barber: The bottom line is that if you start by making the correct assumptions in your plan for inflation, then you can determine the portfolio that should be constructed for you, right? 

Not just, this whole thing of everybody is like a herd of cattle and should be doing the same things, is insane, because we all have different amounts of money. 

We’ve got different resources, money in different tax buckets, and different Social Security. Some of us have a pension, some of us don’t have a pension. Some of us have rental income and some of us have farm income. You can’t just make a blanket statement, “This is how your asset allocation should be.”

It all starts with that financial plan. In that financial plan, we talked about in the very opening part of today’s program that you have to have the correct assumptions in the plan. 

Not All Inflation is Created Equally 

The one assumption that Bud and I see being done, in our opinion, wrong more than any other is the assumption of a low inflation amount. Now, what should you be doing? You should be going and getting detailed and researching and looking at how different pieces of your budget have inflated.

Healthcare is one that absolutely should have a different inflation rate than the rest of your plan. But it would help if you also were inflating things like a college education. 

Maybe you plan on helping a grandchild out with a college education. Perhaps you’re at a point when you’re trying to save for your kid’s college that should be inflated at a different rate. You should be inflating food and energy at a different rate. 

It All Goes Back to the Plan

There are all these things, and you can do succeed with a detailed plan as long as you start with a detailed budget.

Bud Kasper: And those of you who don’t have a comprehensive financial plan. I’m sorry to say, you’re probably going to be a little disappointed because what’s going to end up happening is you’re looking for investment solutions, not planning solutions. If you don’t understand the impact that inflation can have on your overall success, you’re going to be in a sorry state at that time.

Dean Barber: Bud, you and I can agree on this 100%; you should only discuss investment solutions after completing the plan. So you should look for your planning solutions first. Build the plan, then the investment solutions in our eyes become very apparent.

It’s Important to Be Honest with Yourself

Bud Kasper: Right? Suppose you’re honest with yourself and you have a relationship with what I’m going to call a financial advisor, which means it’s probably a financial salesman. In that case, you’re probably not having that experience. 

If that’s the case, educate yourself!

Dean Barber: Don’t forget to read the articles written by Shane Barber, partner here at Barber Financial Group, Should I Buy Gold?, and What Should I Invest My Money In? 

You’ve been listening to America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. We appreciate you being here with us, and we hope that we can help you gain clarity, confidence, and control in your financial situation.

As always, you can experience our Guided Retirement System™ by clicking here to schedule a complimentary consultation.


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