End of Year Tax planning questions?
Use our checklist to help you review typical tax planning issues before the end of this year. Please reach out to your advisor if you have any questions.
Source: 8 Ways 2021 Taxes May Be Different
“Inflation is when you pay fifteen dollars for the ten-dollar haircut
you used to get for five dollars when you had hair.”
- Sam Ewing
In many of our client conversations, the subject of inflation comes up. Inflation is a topic of concern to retirees and people on fixed incomes. As prices rise, their incomes may not keep up and what economists refer to as purchasing power risk is very real. When I was first learning the concepts of financial planning, I was taught an acronym for investment risks.
If you own something like a stock or real estate, you will have market risk and business risk. These ownership assets can be attractive investments in a time of moderate inflation. However, fixed income assets are those where you have loaned your money to another entity for an exchange of interest or dividends. This type of asset is subject to purchasing power (inflation) risk and interest rate risk. As interest rates rise, bonds for example may very well lose principal value if sold prior to maturity. Fixed income is attractive for income and to balance portfolios. In low inflationary times, fixed income generally performs.
The acronym I learned goes like this: BIMP or Business, interest, market and purchasing power risk. Of course, there are all kinds of other risks too. One very important risk is longevity risk or the risk of living too long and having your money run out.
You have probably observed that almost everything is increasing in price. Currently, there is a debate about whether inflation is transitory or a harbinger of a long-lasting shift in our economy. As I was listening last week to Federal Reserve Chairman Powell, he suggested that the causes of our current inflation are temporary and when the global economy returns to a more normal supply and demand balance, prices will moderate.
I think it is helpful to look at recent price data to gain a deeper understanding of our current situation. Here are a few of the price changes since just before the pandemic took hold in the United States. Data is sourced from the U.S. Bureau of Labor Statistics.
Tyson Foods Inc. produces roughly 1 of every 5 pounds of chicken, beef, and pork in the U.S.
It seems likely that the global supply chain is only part of the issue. You may have read about the shortages of semiconductors affecting automobile/truck production and used vehicle pricing. The other aspect of inflation is demand. Federal government fiscal programs have injected money into the U.S. economy, so Americans have two things: more cash to spend and Covid caused pent up demand.
Linette’s daughter Ashley and her husband Joe tell us that the Hive Social restaurant in Oregon City they own is finding prices rising and some products unavailable. Wages and benefits are also more costly which puts pressure on owners to raise prices.
Inflation can be somewhat personal. To understand how it is affecting you, check your own spending and costs. Look back a few months and see if there has been a change in what things in your life cost. I was a little shocked to pay over $90 to fill my gas tank last week. It wasn’t so long ago that it was around $50. At our office we have adjusted financial planning inflation expectations for the future to 3%.
We will all have little choice but to watch and see whether rising inflation is transitory or here to stay. See you at the gas pump.
Wishing you the best of the December holidays,
Judith McGee, L.H.D., CFP®, ChFC®
Executive Vice President and Senior Lead Advisor
The first report on inflationary trends is available this week with the release of the November Consumer Price Index. Prices rose 0.9% in October and have risen 6.2% over the past 12 months. With the holiday season in full swing, consumer prices are not expected to show any significant slowdown.
Source: Broadridge Investor Communication Solutions, Inc.
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