Inflation Perils
As the Fed continues to pump $40 billion-a-month in bond purchases, there is a risk that U.S. currency will ultimately devalue, leading to higher inflation rates. This can result insufficient retirement balances to achieve an individual’s goals because of faulty assumptions within a financial plan.
The figures look worse if you actually look under the hood of the factors which calculate Consumer Price Index (The indicator economists use to measure inflation). CPI is calculated with a principle known as substitution. Substitution simply states that when the cost of fresh vegetables creeps too high, the government calculation assumes you buy canned veggies—and thus any additional inflation on vegetables is avoided. This can make inflation seem more bearable than reality of the situation.
Potential Rising Taxes
Even after the recent tax law changes, I believe there is the likely possibility of an increase in income tax over the long term as government will need more revenue to pay for social programs and national debt. With the debate over the debt ceiling set as the next big Washington grudge match later in the quarter, it’s a question as to whether potential tax increases are completely off the table.
While healthcare is typically cited as the greatest retirement expense, increasing federal, state, & local sales tax could start to eat into your retirement wallet. Required minimum distributions at age 70 can also force to pay tax on withdrawal (taxed as income whether you need it or not). To help plan for this impact we work with clients on weighing the pros and cons of pre-RMDs or partial Roth conversions. Ultimately, if not managed properly, taxes may reduce spendable cash and cash saved for retirement.
Weakened Day-to-Day Budget Management
There was a decline in personal saving rates among employees in the first half of 2012 compared to the same period in 2011. This can partially be attributed to more employees requesting retirement plan loans and hardship withdrawals. While there is no doubting that the last recession and protracted unemployment has been a weight on some people’s ability to save, it is time for revisit the idea of a budget and get back to the basics of cash-flow management. If you do not know what you are spending and where you are spending it on a monthly basis, there are a number of tools out there to help you sort this out. Our clients have access to a spending tool through our financial planning portal.
Not only is budgeting helpful to give your current savings a boost, but it can also provide a clearer picture of your expense needs now and during your projected retirement.
With so many risks that seem out of control, working with a guide through retirement transition is a great idea. Independent perspective rooted in financial planning is the best place to start.
