This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here for the full discussion.
A listener asked:
“We created our financial plan assuming inflation would cool down. Should we rethink our numbers if it doesn’t?”
This is a great and very timely question. Let’s break it down.
Where We Stand Now
While recent inflation numbers show that inflation has eased from the highs of the past few years, it still remains above the Federal Reserve’s long-term target of 2%. Naturally, that has some investors wondering: what if inflation stays persistently higher?
The Good News: Long-Term Plans Can Handle Some Fluctuation
Most financial plans are built with a long time horizon in mind. If inflation runs at 2% to 3% for the next few years, this alone is unlikely to derail a sound financial plan—as long as you believe that over decades, the long-term average will return closer to the historical 2% range.
If you believe that inflation will permanently run much higher (3% to 4% or more), then yes, some adjustments may be needed.
How to Adjust If You Expect Higher Inflation
If you are in the “higher for longer” inflation camp, here are a few areas to focus on:
1. Rethink Spending
- Some expenses rise with inflation (food, energy, consumables).
- Other costs, like mortgage payments on a paid-off home, are less affected.
- It helps to segment your expenses so you understand which parts of your budget are more vulnerable to rising prices.
2. Review Portfolio Allocation
- Certain asset types fare better in inflationary environments.
- For example, equities can often pass rising costs through to consumers, preserving earnings and value.
- Real assets (like real estate and commodities) can also hedge against inflation, but they may not always generate the income needed in retirement.
- Gold can hedge inflation but does not provide income, so it should not be the core of a retirement portfolio.
3. Manage Lifestyle Inflation
- Lifestyle inflation—allowing your spending to creep up as income grows—is always worth monitoring.
- In an inflationary environment, it can be especially helpful to identify areas where you can limit lifestyle increases to help offset the impact of higher prices.
What We Expect Moving Forward
While no one can predict the future with certainty, current inflation rates (~2.5%) are much improved from the 10%+ levels of a few years ago.
If inflation continues at this level, it is not enough to warrant panic or major changes. Historically, inflation tends to revert toward that long-term 2% target. There are always bumps along the way, but for most clients, this is not a reason to throw out the financial plan.
Final Thoughts
If inflation persists at slightly higher levels for a time, a well-built plan should be able to handle it. But if you believe we are headed into a new, prolonged era of elevated inflation, it is worth reviewing your spending expectations and asset allocation.
Either way, being thoughtful and proactive is always the right approach.
For more perspective on inflation and financial planning, listen to the full podcast episode here.