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Inflation Fighting Strategies Class-01-23.pdf

  1. 1. Inflation-Fighting Strategies for Older Adults Dr. Barbara O’Neill, CFP®, AFC® Owner/CEO, Money Talk
  2. 2. Disclaimers
  3. 3. 2022 Flashback
  4. 4. 2022 Leading Personal Finance Topic
  5. 5. What is Inflation? Source: Next Gen Personal Finance
  6. 6. Question: Where Are You Experiencing Inflation the Most Right Now?
  7. 7. Primary Inflation Driver: Demand-Pull Inflation
  8. 8. Three Inflation Causes
  9. 9. A Perfect Storm of Factors
  10. 10. Inflation Illustration Source: Next Gen Personal Finance
  11. 11. Rule of 72 The Rule of 72 also applies to doubling prices of goods and services!
  12. 12. The Rule of 72 in Pictures The same math applies to the doubling of prices as well as to savings!
  13. 13. Inflation Measurement Tool
  14. 14. CPI Information Source Source: https://www.bls.gov/cpi/
  15. 15. Your Personal Inflation Rate ≠ The CPI
  16. 16. Inflation Data (50+ Years) Source: Next Gen Personal Finance 1/22- 7.5% annual rate 3/22 and 7/22- 8.5% annual rate 6/22- 9.1% annual rate 12/22- 6.5% annual rate
  17. 17. CPI Rate is Annualized • Guards against “blips” in inflation data (up or down) • No need for seasonal adjustments (compares the SAME month a year apart) • Disadvantage: emphasizes recent history rather than current events when there are abrupt changes – By averaging a higher past CPI with a lower recent CPI (now) OR – By averaging a lower past CPI with a higher recent CPI (2021)
  18. 18. Inflation Rates: 2011-2021 Source: Next Gen Personal Finance
  19. 19. Inflation Impacts
  20. 20. Inflation Effects By Income Source: The Wall Street Journal: https://www.wsj.com/articles/inflation-takes- biggest-bite-from-middle-income- households-11672246653
  21. 21. Federal Reserve Dilemma Source: Next Gen Personal Finance
  22. 22. 2022 Interest Rate Increases • By December 2022, the Federal Reserve increased the federal funds rate SEVEN TIMES to a range between 4.25% to 4.5% from near 0% • Increases of 0.25%, 0.5%. 0.75% (4 times) & 0.5% • Expectation of high rates through 2023 with no rate reductions expected until 2024 • Impacts: Higher costs for new mortgages, ARMs, and variable rate credit cards; also, higher interest on savings accounts and CDs.
  23. 23. Credit/Debt Impacts As of January, 2023… • The average credit card rate is 19.6%-an ALL TIME HIGH- after rising in step with Federal Reserve interest rate hikes • Almost half (46%) of credit cardholders carry debt from month to month, up from 39% last year. Source: CNBC https://www.cnbc.com/2023/01/10/americans-lean-heavily-on-credit-cards- amid-inflation.html
  24. 24. Mortgage Rates Source: Freddie Mac https://www. freddiemac. com/pmms
  25. 25. What Can We Do About Inflation?
  26. 26. 1. Groceries • Make substitutions (store and generic (?) brands) • Eat more meatless meals • Stock up on sale items • Consider a warehouse store • Eliminate high-cost “junk” foods/eat less food • Use coupons/double coupons
  27. 27. “Shrinkflation” Source: Corporate Finance Institute • Used by manufacturers to “disguise” higher prices • Pay attention and compare package sizes and unit prices • Wait for sales and stock up • Buy fewer pre-packaged foods • Compare store brand prices (often last to adjust unit prices)
  28. 28. 2. Eating Out • Rethink restaurant drinks- drink water • Share an entrée or dessert • Eat an appetizer as a meal • Select BYOB restaurants for meals with adult beverages • Eat out for lunch or “linner” or “early bird specials” • Bring takeout containers for another meal
  29. 29. 3. Gas • Drive less/consolidate trips • Find cheap gas (GasBuddy, Waze) • Pay with cash • Join a fuel rewards program (e.g., RaceTrac Rewards) • Time your fill-ups (Sun/Mon-best; Thurs-worst) • Check tire pressure and lighten loads
  30. 30. 4. Road Trips/Vacations • Pack snacks and beverages/food in a cooler • Try to eat out only once a day • Stay at hotels with free breakfast • Get hotel coupons at rest stops • Travel with a group and share expenses • Travel at “off peak” times (e.g., shoulder season) • Join hotel/airline rewards programs • Daycations and staycations to save on gas
  31. 31. 5. Utilities • Adjust thermostat (a little warmer in summer [thermostat up]) and cooler in winter [thermostat down]) and use ceiling fans • Turn down water heater from 140° to 120° to 130° • Unplug items not in use (power strip) • Take advantage of off-peak rates/time-of-day meter • Change HVAC system air filters regularly • Use LED light bulbs • Wash (most) laundry in cold water • Empty dryer lint trap after every load • Switch to low-flow showerheads
  32. 32. 6. Clothing • Buy fewer clothes and shoes • Shop department store sales and use coupons • Join retailer loyalty programs to earn rewards • Shop at thrift and consignment stores • Shop for deals online (e.g., ASOS, Mango, Amazon) • Make clothing repairs and alterations
  33. 33. 7. “Big Ticket” Items • Wait inflation out, if you can (e.g., houses, cars, computers) • “Rule of Three” product comparisons • Pay more than the MSRP? • Lock in low(er) interest rates on loans
  34. 34. 8. Insurance • Play “what if?” with your insurance agent • Double check policy discounts you qualify for (e.g., multi-policy, age 55+ driver, military veteran, long- time customer, low mileage driver) • Shop around for coverage (Rule of Three) • Explore payment options (fewer payments is cheaper) • Sign up for auto-pay or online billing statements • Maintain a good credit record
  35. 35. 9. Household Budgeting • Identify “price increase trigger points” and budget more – Examples: rent, property tax, insurance premiums • Review bills for evidence of “junk fee packing” (e.g., cell phone, cable, event tickets, insurance policies) • Discontinue low value auto-pay bills (e.g., gym memberships, satellite radio, streaming services) • Find ways to cut expenses (YOU decide how) • Anticipate windfalls (e.g., tax refund, cash back rewards)
  36. 36. 10. Saving and Investing • Review your TOTAL portfolio: Is the return > taxes and inflation? If not, you are losing purchasing power! – Minimum Rate of Return formula: MRR = inflation rate ÷ 100 minus federal marginal tax bracket – Example: 6% ÷ (100-.22) = 6 ÷ .78 = 7.7% • Ladder fixed-income securities (e.g., bonds, bank CDs) to hedge inflation • Consider Series I bonds (6.89% return through 04/30/23), fixed annuities, brokered CDs, Treasury bills, and online bank savings accounts for higher yields • Hang tough; don’t panic and sell quality stocks
  37. 37. It Pays to Shop Around! • 0.24% average interest rate on U.S. bank savings accounts in December 2022 • You can find mutual funds and ETFs with Treasuries in duration of 1 year or less paying more than 4% • Online bank savings and money market accounts and 12-month CDs are paying 3.3% to 4%+ (1/23) • Search “Best Online Savings Accounts” online
  38. 38. You Have Options! • There are likely trillions of dollars sitting in big brick- and-mortar bank accounts earning practically nothing • With the Fed Funds Rate over 4%, this is not necessary • Online banks have no branches (less overhead) and more competition • You can buy Treasury bills through Treasury Direct OR via a bank or broker (secondary market)
  39. 39. Investment Withdrawals During Market Downturns • IF you have guaranteed income (paycheck, SS, pension, annuity) to pay all your living expenses: Ride out market volatility by leaving stock investments (e.g., index funds) alone; rebalance portfolio as needed • IF you are living primarily off investment withdrawals (e.g., FIRE proponents and retirees): Consider reducing withdrawal amounts or skipping annual inflation adjustments and/or tap cash assets for living expenses to avoid selling stocks when values are down
  40. 40. Positive Aspects of Inflation • Inflation-linked COLAs on Social Security, some pensions, some union or employment contracts • Inflation-adjusted Treasury Inflation-Protected Securities (TIPS) and Series I bonds • Higher wages for workers (industry- and company-specific) • Impact on Debtors- People with fixed-rate loans can repay lenders with “cheaper dollars” • Impact on Investors- Short term bonds, high-quality stock, and some real estate, commodities can do well
  41. 41. Positive Aspects of Inflation • Increased contribution limits for tax-deferred retirement savings plans • Higher income ranges in the seven federal marginal tax brackets; people may be taxed at lower tax rates • Higher standard deduction amount; people can shelter more income from taxes • Higher income ranges for IRMAA Medicare surcharge • Higher estate/gift tax exemption ($12.96 million in 2023) • Higher bank account interest (shop around for best yields)
  42. 42. Positive Signs: Items Where Prices Recently Stabilized or Declined • Music streaming services • New video games • Smartphones • Gym memberships • Televisions • Computer software and accessories • Wireless phone service • Internet services • Admission to sporting events • Used cars • Apartment rents
  43. 43. Inflation- Induced Higher Income Cautions • Taxation of Social Security benefits • IRMAA (Medicare surcharge) • NIIT
  44. 44. Inflation-Fighting Action Steps • Try to “claw back” inflation-related costs via budget cuts • Prepare for future variable rate interest increases/reduce debt • Stop unnecessary automated expenses (e.g., gym, magazines, newspapers, satellite radio, etc.) • Negotiate for better prices (e.g., cell phone, insurance policies, credit card interest); Ask: “What discounts are available?” • Take advantage of inflation-adjusted income increases via COLAs (e.g., pension, Social Security, income tax indexing) • Consider ways to increase income?
  45. 45. Inflation-Fighting Lifelines and Major Lifestyle Changes All Ages • Government and non-profit public benefits (e.g., needs-based SSI, food pantries, utility and rental assistance) • Multi-generational housing arrangements • Roommates, boarders, Airbnb, Vrbo, etc. • Downsizing housing (+ utilities, maintenance, property taxes) • Life insurance loan or reduced coverage (use caution!) • Fewer discretionary expenses (e.g., eating out, gifts, travel) Older Adults • Reverse mortgages and sale-leaseback • Working in later life • Rethinking 2nd car ownership, tapping more savings than planned
  46. 46. Where is Inflation Headed For 2023? Stay tuned! •Federal Reserve actions/interest rates •Ukraine war •Politics •Student loan forgiveness decision •Supply chains •Other factors
  47. 47. Your Personal Inflation-Fighting Plan Turn your to-do list into atomic financial habits; small steps can produce big results
  48. 48. Comments? Questions? Additional Inflation- Fighting Ideas? Try a few ideas that will work for you.