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INFLATION:  Progress or Treading Water?

INFLATION: Progress or Treading Water?

January 08, 2018

In 2003 I was meeting with a 35-year old client with an annual income of $150,000. During our cash flow discussion, I shared with him that I expected that by the time he was 50-years old that he’d be earning close to $250,000.

“From your lips to God’s ears!” he said, “but I don’t think that will happen.”

“Why not? You’re talented and you are always hitting your work goals. What will change?” I asked him. 

“I just don’t see my company ever paying me that much money.”

“Do you think you’ll earn at least a 3% raise each year?”

“Absolutely! 3% is a cost-of-living adjustment. If all I got was 3%, I’d probably quit!”

Using a financial calculator in The Living Balance Sheet® software, I showed the client his income growing 3% annually for 15-years and it came to just over $233,000. 

“Wow. I see the math, but it just doesn’t seem possible to me.” He said, seemingly still not convinced.

Fast forward to our annual financial review meeting last month and his income has grown to more than $280,000 a year. Yes, he is earning more physical dollars each year. However, his lifestyle is about the same as it was 15-years ago. The dollar amount he saves each year keeps growing, but as a percentage he still saves the same 20% into long-term Wealth Building.

Inflation is defined as a general increase in prices and fall in the purchasing value of money. It is sometimes referred to as the silent tax.

Here are some planning considerations for those that are still in Wealth Building mode:

  • Get Ahead of Schedule – Using a 3% inflation rate, calculate your inflation-adjusted income 15-years out. From the example above: a $233,000 annual income earner today is projected to be earning an annual salary of $360,000 15-years from now. Dedicate time in 2018 to exploring ways to increase your income to that inflation-adjusted benchmark faster than 15-years. Then, use the surplus to increase your Wealth Building Capacity.
  • Use Inflation Friendly Financial Products – Consider using financial products like 30-year fixed mortgages and wealth building Whole Life insurance that offer a guaranteed fixed cash flow requirement for the life of the product. As your income grows, the percentage these line items take up in your annual budget decreases.
  • Long-Term Wealth Building Dollars – Position your long-term wealth building dollars to protect them from the erosive effects of inflation. You may want to consider using 401(k) plans that invest in stock based mutual funds and other stock market based investments can help your long-term savings dollars keep pace with and even outpace the effects of inflation.
  • Review Your Protection Domain – Consider the primary wage earner that purchased a $1,000,000 term life insurance benefit to help protect his family. 10-years later, using the 3% inflation rate, the impact of $1,000,000 of benefit 10-years later will feel like less than $745,000. Consider your own insurance decisions from 10-years ago in the context of your current income. After you factor in the effects of inflation, does your current life insurance and long-term disability coverage provide the same level of protection it did when you first bought it?

The effects of inflation impact everyone.

Over the next week, please take some time to consider how inflation may have impacted your own financial plan. Verify that you are actually making progress and not just treading water.

For a more in-depth discussion about how inflation may be affecting your Income and your Balance Sheet, please click the following link and request a no-cost, no obligation meeting.

Thank you for reading!