Incorporating Inflation Into Your Financial Planning

Implementing inflation into your financial models can help make forecasts more accurate and prepare you for changes to the economy. There are resources available that make dealing with inflation simpler.

Consider including in your portfolio an array of growth investments that have historically outpaced inflation to protect purchasing power and maintain purchasing power, such as stocks and inflation-linked bonds such as Series I bonds or Treasury Inflation-Protected Securities (TIPS).

Review Your Budget

Inflation is an unavoidable economic reality that erodes savings and investments over time, yet increasing your understanding of inflation can enhance financial planning decisions and enable you to manage its effects more effectively.

Review your budget as the starting point. Inflation can increase costs across the board, straining fixed incomes. By creating a budget which accounts for inflation, you can adapt spending and savings projections accordingly.

Start by calculating both current and projected expenses with an inflation calculator such as SmartAsset’s free tool. Review your plan annually to ensure it accounts for inflation. In addition, SmartAsset’s free tool connects you with pre-vetted advisors in your area that are available for interviews at no cost – start searching now.

Plan for Long-Term Care

Long-term care costs can quickly add up, draining funds from your estate. Instead of leaving this responsibility solely up to family, who may either refuse or not have enough to cover these expenses, consulting a financial professional could help explore various funding solutions such as long-term care insurance or government programs to meet this financial need.

Integrating inflation into your financial model and forecast takes some extra work, but can protect your savings against rising prices. Start by adjusting costs and revenue projections to account for expected inflation rates, then experiment with different assumptions to see how your plan would fare under different levels of inflation.

Diversify Your Investments

An effective investment portfolio can provide protection from inflation. Certain asset classes have historically fared well during inflationary times, such as stocks (especially those belonging to growth-oriented companies), real estate and commodities like gold.

Other strategies might include diversifying your portfolio with short-term bonds (which tend to perform better during periods of inflation) and Treasury Inflation-Protected Securities (TIPS), which offer a fixed rate that adjusts with inflation rates. Furthermore, rental property can help provide income that might outstrip inflation.

Implementing inflation into your financial planning can help you reach long-term goals by adapting savings and retirement plans accordingly. Reducing spending, creating an emergency savings account and diversifying investments are ways to mitigate inflation’s effect on achieving goals, but even with careful preparation it remains an ever-present threat that needs attention and action taken against it. To learn more about incorporating inflation into your planning contact an advisor for advice.

Prepare for Retirement

Steps should be taken to safeguard purchasing power when approaching or having already retired, including making sure your budget accounts for inflation, selecting income options that can adjust with inflation (such as annuities with inflation riders) and investing in Treasury inflation-protected securities to help combat rising costs.

Even moderate rates of inflation can significantly erode your purchasing power and gradually chip away at savings and investment returns.

Financial advisors are an invaluable resource when it comes to inflation planning, helping assess your risk tolerance and craft an age-appropriate diversified portfolio. Furthermore, they can advise ways to align expenses and income with inflation – for instance by delaying Social Security benefits or increasing savings rates – and manage risks such as setting realistic expectations about purchasing power withdrawals, as well as selecting investments which outpace inflation risks. Adding inflation adjustments into cost of living increases or choosing guaranteed income plans with COLA is also advised by financial experts.