The Wiser Financial Advisor Podcast

Get Real. Get Honest. Get Clear.

The Silent Thief: Inflation

Episode 20, “The Silent Thief” is a look, and a lesson, about inflation.  Josh looks at how it can work for us and against us, both in business and our personal life.  This episode will arm you with the knowledge of how inflation will influence your present and future financial actions.

Host Josh Nelson explains how you can best be prepared for the up’s and down’s of inflation.  For instance, how to be prepared for the inflation factor during retirement as there are variables, like longevity, that cannot be known when calculating how long your post retirement income will last.  He highlights how to customize personal or business investment portfolios to come up with an investment strategy most appropriate for you.  


Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly at . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Google, Spotify, or your favorite podcast service. Let the financial fun begin!

My wife and I were filling out our baby book for our daughter who’s turning one here in a couple of months. How crazy, that she’s gotten that old! Time goes super fast. But it made me think back to my own baby book. One of the things you do in a baby book is fill out the prices of things today. Why do that? Because someday looking back, we will realize how much prices have gone up over the years. Anyway, I thought it would be interesting to do that for myself and go back, but I couldn’t find my baby book. However, I did find a website called where you can check whatever decade you want to look at. I was born in 1975, and it was interesting looking at the cost of a new home back then. It was about $42,600 versus $199,200 today (average across the country). According to Google, the average household income in 1975 was $11,800 per year. It’s now at $68,000. Then a first-class stamp was 10 cents and now it’s 55 cents. A gallon of gas was 57 cents and now it’s $2.50. A dozen eggs at 77 cents is now $1.48. And a gallon of milk was $1.57 back then, now $3.61. All of that is a record of inflation.

A couple of other interesting data points looking at 1975:

Unemployment was 5.6%. Today 6.3%. Not a whole lot different.
Inflation rate (holy cow!) was 14.1%. Today 1.81%.

A lot of us don’t pay attention to inflation because it’s a silent thief. It creeps up on you over time. Sometimes prices go way up and you notice, but really, it’s kind of a silent thief. When you look over the years, things just get more and more expensive. I think inflation is getting more attention today because there’s a lot of spending going on. We’re spending in the trillions of dollars, something we’ve never done before. There’s a fear that all the deficit spending we are doing here in the United States right now could cause a real inflation problem and cause inflation to take off.

Inflation is not unhealthy—as long as it’s kept in check. Inflation is the prices of things going up over time. And naturally, products and services get better over time. As businesses figure out different ways of doing things, they realize, “Hey, we can charge more for that.” And of course, the products and services they need to pay for as business owners also have their own cost increases.

If you have hyperinflation like we had back in the 1970s—as evidenced by the 14.1% inflation in 1975—is that a good thing? Not really. In fact, it can be quite a bad thing if the inflation rate is going up much faster than people’s incomes. That can cause a real problem, because if your income isn’t keeping up with at least that same rate of inflation as a business owner or individual or retiree, your quality of life is actually going down a little bit each year. Sometimes it’s a lot each year, if you have a fixed income or a declining income compared to that inflation rate.

One of the mandates of the Federal Reserve is to keep inflation in check. And a few years after 1975, the Fed came in and said, “Hey, we’re going to kill inflation.” How? They raised interest rates way up. This caused the economy to slow way down and also caused inflation to go way down.

What about deflation—when prices go down—is that a good thing? Well, on the surface maybe it seems like it. When prices are going down you think, “Oh, that’s great. I can buy more stuff with my dollar.” But it isn’t necessarily a good thing. Deflation doesn’t happen very often and typically only when the economy is in real trouble, like during the Great Depression. We had significant deflation back then. Other times, the only kind of deflation we see is small pockets of it. Individual products sometimes get less expensive over time. Examples include personal computers, which have gotten a lot less expensive, and the price of a Tesla, which is also getting less and less expensive. Certain things get less expensive over time as there’s more and more supply.

So this is not meant to be an economics lesson. I just want to draw attention to the reality that inflation is a real thing and something we need to pay attention to. We do rarely notice it on a day-to-day basis. That’s why I call it the silent thief—because it does creep up on us. What is the impact on us as individuals? If we’re working, we need to make sure that our earnings are at least keeping up with the rate of inflation so we don’t see our quality of life go backwards. Effectively, that’s what would happen if the products and services we’re paying for are going up but our paychecks are not. The inflation rate right now is about 2% per year. Historically, if we look over the last 100 years or so it’s about 3% a year on average, meaning we need our earnings to go up by at least 3% every year just to keep up and be able to buy the same stuff. We’re not talking about different stuff or more stuff; we’re talking about being able to keep up with cost increases. As business owners, it’s also important to raise the price of your products and services by at least the inflation rate on your own costs. Otherwise, your business is going to be going backwards.

A good target to be thinking about today is retirement. In planning for retirement or if you’re already retired, it’s really important to incorporate this information about inflation into your own financial planning. In the olden days, we had a rule called the three-legged stool. Back then when planning for retirement, people would have a pension, they would have social security, and they would have some personal savings. Those were the things they would be able to rely on for their retirement income. Now, most people don’t get company pensions anymore. In most cases, people stopped getting company pensions a long time ago. Social Security is still there, but a lot of people are skeptical about it being there in the future for them. And if you talk to anybody who’s started getting Social Security benefits, they’ll tell you that any increases they get are very small and usually get eaten up by the price of their Medicare insurance. This situation has put a lot more pressure on us as individuals to make sure we’ve got enough money saved, knowing that we really can’t rely on things the way people in decades past could do. Another thing to recognize is that back in the 1970s, or 1950s, or 1930s, people didn’t live nearly as long. Life expectancies have gone up like crazy over the years, which means that people retiring in their 50s, 60s or even 70s still have a long time to live and need to be able to plan for decades. Inflation will impact them for sure. Why talk about this? Because it’s one area that a lot of people don’t pay attention to and it becomes a silent thief. But if we don’t include this in our own financial plans, then we’re going to end up in trouble over time. Either we’re going to have to accept that our quality of life will go down every single year by the rate of inflation, or we’re going to be dipping into our savings principal and spending down our wealth as we get older.

Now, you might say, “Well, so what, at some point, I’m going to die, I don’t need to leave a huge amount of money to somebody.” The trick is, you don’t know how long you’re going to live and neither do I. If you live longer than you had originally planned, you could run out of money. And we know from various studies over the years that retirees’ greatest fear is running out of money in retirement. So certainly, we want to plan for this now or as soon as possible, because you don’t want to be somebody who is in their 70s, 80s or 90s running out of money or being afraid of that. We don’t want that kind of stress when we are in retirement and past the point where we’re earning money from an income. You could be like Warren Buffett who’s 90 years old and still works. A lot of people don’t have that option, though, or they don’t want to be earning an income when they are 90 years old.

As financial planners, one of the things we oftentimes use is the 4% rule. That is, you can take up to 4% per year out of your investment portfolio and have a good probability of not running out of money. If you have a balanced portfolio mixing stocks and bonds of various types, historical numbers indicate that 7% seems to be a reasonable rate of return looking at long-term averages. That’s for somebody who has a reasonable risk tolerance. “Risk tolerance” is part of the jargon we use, and it means the level of risk that someone can tolerate. There’s always a risk of loss with any investment but there’s also a likelihood of gain. If someone has “risky” assets like real estate and stocks as part of their portfolio, we can usually get a 7% rate of return for that particular investor. So if we use 3% as the long-term inflation rate, what we have is 3% inflation + 4% withdrawal = 7%. Then hopefully you’re covered and inflation can’t erode your finances.

Some people say, “I don’t like taking any risk, (low risk tolerance) so I’m going to take less risk.” They will get a lower rate of return. That person may not be able to make the 4% rule work because if we use the same math but we’re only getting a 2% rate of return, we’re going backwards every year. The equation then looks like this: 3% inflation plus 4% withdrawal still equals 7% for a safety number but when your return is only 2%, you’re not keeping up with inflation. It becomes a race against the clock. It could end up working out, but it’s risky, because at some point, mathematically, the money will run out unless you start with an awful lot of money. Especially if you’re a more conservative investor, (more risk averse) you might want to think about making sure you’ve got a portfolio that not only will allow you to sleep at night, but also will allow you to make the math work for you.

With all this, we’re talking about a diversified investment portfolio, we’re not talking about you going out and buying one stock or one piece of investment property. Diversified investments are the sorts of investments that have a chance of outpacing inflation over time. Hopefully, you will have a mix of investments that was custom designed either by you or by a financial planner that knows you really well and knows the level of risk you want to take. The investment portfolio you have really needs to be custom designed for you. Either you’ve spent the time or you hired a financial planner that worked with you to come up with a portfolio that would be appropriate for you and the level of risk you want to take and the level of return you need.

There are no guarantees. We’re looking at historical numbers. The key is to have a plan that’s going to at least have a good potential, at least a higher probability of working out over time—one that will not only give you the rate of return you need for this year, but for next year and the year after that and so on, because we know you’re going to need a little more each year.

From a practical standpoint, do my clients call me up every year and say, “Hey, I need more money.” No. It tends to happen in fits and starts, because inflation kind of creeps up on you. Maybe after several years, somebody says, “Hey, I need a little bit more money. Property taxes have gone up,” -or whatever it may be.

So the question to ask yourself today is: “Do I have a financial plan that’s taken inflation into account?” And think about the consequences of not doing that. Let’s say you had Social Security. And let’s say you just took whatever savings you had and you put it in the bank, put it in a CD or something like that. How much are CDs paying right now? Not very much. They have a very low rate of return. So inflation is low, but interest rates are also very, very low.

A fixed income from a pension will mean a guaranteed income for life, which sounds good, but every year, it will be worth a little less. It’s not going to go quite as far as it did the year before. And as I said above, Social Security doesn’t go up very much and the increased cost of Medicare kind of eats that up. CDs are not outpacing inflation; they’re actually returning less than inflation right now. That works out well only if you have a short retirement. Life expectancies have gone up, and if you’ve got wealth that you’re spending down every single year and you don’t know how long you’re going to live, that looks like a scary proposition.

It’s important to take inflation into account and incorporate its effects into your own financial plan. If you don’t have a retirement income plan that’s been custom designed for you and worked up to make sure there’s a high probability of not running out of money, it’s important to do that. Either hire somebody or do it yourself. Have a plan that incorporates the silent thief of inflation.

Money alone will not buy happiness, we know that. But there have been various studies showing that for up to about $75,000 per year of household income, money does buy happiness. At least that’s what people are reporting in surveys. If you think about it, that’s about the level of income you would need to be able to cover your basics: to get medical coverage and be able to feed yourself and pay for housing and utilities. So, once we get to that $75,000 Mark, those Happiness Studies kind of table off and we find that more money doesn’t buy happiness. But sometimes, when thinking about any financial planning topic, people get a little overwhelmed. They say, “You know what? Well, money doesn’t buy happiness.” And they use that as an excuse not to plan.

It’s important to do this, not only for yourself but for your family. It’s important from the financial security standpoint, because most people’s goal is to not run out of money. But also, when we think about people’s dreams, really, I think of financial freedom as having an income that we can’t outlive, or at least we have a high probability that we won’t outlive that income—and work is optional. Warren Buffett works because he wants to right now, not because he has to. At 90 years old, he’s living life on his terms. He still drives an old pickup and goes to McDonald’s most days for his breakfast. So living life on his terms applies to him and what he wants to do. For other people, it may be something completely different. But that’s why it’s so important to custom design this for you and take inflation into account as you look ahead.

With that, hey, thank you for being here today. Thank you for helping to promote the Wiser Financial Advisor, and please let your friends and family know about the show. You can subscribe through your favorite service, such as Apple, Google or Spotify. Please go ahead and share this with as many people as you think would be helpful. This is about helping people. That’s why I got into this business because I really am here to be able to serve not only my existing clients, but also the greater population. There are a lot of people out there that need to hear stuff like this. When I talk to people who have accumulated wealth, almost 100% of the time they say, “You know what, there was somebody, either parents or a manager or coworker, who got me started thinking about money and thinking about getting good financial habits.” So I want to make sure that we are one of those voices out there for anybody who needs to plan.

I hope you have a wonderful week and God bless.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.