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Managing High Inflation in Retirement

December 29, 2021 by Jacob Sensiba Leave a Comment

Inflation is high. We all know that. I’ve been writing about it for months and it appears that it’s here to stay. With all of that said, I saw a question the other day about how to manage the high inflation when you’re in retirement, and I thought it was a good topic to talk about today. So we’re going to discuss high inflation in retirement, how it’s impacting retirees, budgeting strategies, investment strategy changes, and if inflation will be an ongoing concern for retirees.

Inflation right now

It’s high…no surprise to anyone. In January it was 1.4%, in April it was 4.2%, in July it was 5.4%, in October it was 6.8%, and in December it was 5.9%. That’s historically high. The highest it’s been in 40 years. Will that stay, only time will tell and we’ll get into that later.

How is it impacting retirees?

Things are getting expensive, so when you set a budget at the beginning of your retirement you account for the current price of the things you need. You should also account for increased costs of items as time goes on because there can be big or small increases…either way, prices costs will go up.

Groceries and energy are two prime examples of things that have gotten more expensive recently. So when those things went up in price, it probably pinched people’s budgets, and/or pushed forward costs that probably weren’t expected for several years. Odds are, they’re spending more money now on food and energy than they anticipated. Hopefully, people have been able to make adjustments already.

Budgeting Strategies

There really aren’t a lot of tips I can give you. The best thing I can really say is to cut costs where it makes sense to account for things that are now more expensive. The other tip, though this is more of a gamble, is to not make any changes now and make changes in the future when inflation comes down.

Investment Strategies

With your investment, you’ll need to reallocate some assets. I wouldn’t take any money out of stocks. What I would do is take some money out of your bond investments and put it into precious metals. The FED said that they plan on hiking rates three times in 2022. Bond prices will go down when interest rates go up. Increasing your stock allocation or putting some money in precious metals could be a good way to combat inflation.

High inflation here to stay?

No, I do think it will be here until the FED hikes rates, but my reasoning for that has to do with what happened in 2018. If the FED can raise rates without putting a cork in the recovery, then I think there’s a possibility that inflation and the federal funds rate will stay elevated until the bubble pops.

Disclaimer:

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com

Jacob Sensiba

My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com

www.crgfinancialservices.com/

Crypto, Reddit, Stock Market Thoughts

February 10, 2021 by Jacob Sensiba Leave a Comment

The last couple of weeks have been crazy in the stock market. With Reddit putting a short squeeze on Wall Street, crypto assets going gangbusters, and speculation about what inflation will do in the near future, there’s a lot to talk about.

Reddit vs Wall Street

Gamestop and AMC Entertainment are the two biggest names when we talk about Reddit investors.

A large number of shorts were put in by hedge funds and other big players on Wall Street. A specific Reddit account “recruited” its following to pile into the two companies named above. This group of “retail” investors drove the stock price up (as well as other investors that caught wind of their efforts).

Those hedge funds were forced to cover their shorts so they didn’t lose more money. The stock price for those two companies plummeted in the following days, but that doesn’t negate what Reddit did – they beat the big guys.

What’s a short?

A short is a type of trade. What you do is you borrow shares of a stock at a specific price in hopes that the stock price will drop. If it does, you buy back those shares at a lower price and collect the difference.

For example, if you bought shares of XYZ company at $20 and the share price of XYZ drops to $10, you would cover your short and earn $10 per share as a return.

It’s not for the faint of heart because stock prices effectively have no ceiling, so you could lose A LOT of money.

Crypto

Cryptocurrencies gained traction over the last few years as investors saw potential. After Bitcoin rose to $20,000 per BTC and crashed, it lost its allure.

Social media brought it back, thanks to Elon Musk. Slight changes in his Twitter bio moved the needle very effectively. Bitcoin is now hovering at $50,000 per BTC. Tesla invested a healthy sum in Bitcoin and will now accept payments in Bitcoin.

I believe other companies will adopt this policy and we will see Bitcoin used for purchases more regularly. There is a place for cryptocurrencies in this world, but it’s uncertain what kind of role it will play.

Short-term Thoughts

I go through quite a bit of research each week to get an idea of what the market environment looks like, what the economy is doing, and where there are risks and opportunities in the market.

With that said, the amount of times I’ve read the word “bubble” is alarming. The comparisons to the Dot Com Bubble and the Great Financial Crisis (GFC) are also a cause for concern.

Pundits are using the word “euphoria” more often.

There are a few things to pay attention to:

The divergence between the stock market and the economy. Typically, near the end of the business cycle, a difference between how the market is doing and how the economy is doing grows. Eventually, things will revert to the mean. That’s to say, the difference between the two will shrink.
Inflation. The Biden Administration is taking a different stance from past presidents. Inflation and overstimulation of the economy were areas of concern. President Biden is taking the other side of this argument, saying that he’d rather do too much, than not enough. Look for increased stimulus and less regard for inflation. If inflation starts to run hot, expect the FED to cool it down somehow.

Conclusion

Short-term policy changes and speculative movements in the stock market have little to no impact on the long-term performance of your portfolio. The one thing that really moves the needle is your behavior and how you respond to the news.

If you keep your long-term perspective in mind and keep your emotions in check, you should fare better than those that don’t.

Federal Reserve Report: Hang On For Rough Ride…

September 26, 2011 by The Other Guy 1 Comment

Here’s a depressing recent headline. Today the Federal Reserve Bank of San Francisco released a report predicting that the financial markets are unlikely to be strong for the next…drum roll please…16 years!

Can this be accurate?

The report, titled “Boomer Retirement: Headwind for U.S. Equity Markets?” illustrates long-range, historical data which suggests that as the boomer generation moves into retirement, they’ll pull an increasing amount of money out of equity funds. This can only mean increased pressure on stocks for years to come.

This is classic ‘supply & demand’ economics at work here, folks.

Roughly 10,000 baby-boomers turn 60 EVERY DAY, a trend that will continue for the foreseeable future. As each of these 10,000 individuals leaves the workforce, they need money to spend in retirement. Where will their meals come from? That’s right. Their spending money will come, in part, from investment portfolios.

As the report points out “…to finance retirement, they are likely to sell off acquired assets, especially risky assets. A looming concern is that this massive sell-off might depress equity values.”

Take a look at this projection:

According to the research in this report, P/E ratios, an indicator of potential stock prices, is slated to continue downward through the early 2020s before rebounding in the latter half of that decade.

“Figure 2 shows that P/E should decline persistently from about 15 in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030.”

The report continues: “The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining 13% relative to 2010…real stock prices are not expected to return to their 2010 levels until 2027.”

Ouch. That could sting a little.

So what does this data imply?

Should we all be in bonds until 2030? Quite the contrary. There will likely still be bullish trends throughout the upcoming cycle, so it pays to be vigilant.

Instead, I believe this heralds the end of “buy and hold and you’ll be fine” investing.

This mean you’ll need to be cognizant of market trends and invest accordingly. What does your advisor think about this report? In all likelihood, he’s never heard of it, and will probably say something like “Just invest and stick with the plan, and you’ll be OK.”

You can do better. If you just pay attention to the signs, you can profit from both sides of the market, both the ups and downs. You just have to pay attention.

If you’d like to read this report for yourself, it’s available here or type in http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html to read for yourself.

I’m interested in your thoughts…post your comments below.