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Inflation Info for Doctors [Podcast with Dr. Kristy McAteer]
In today’s economy, fears of inflation are front and center for many. Inflation occurs when there is a decrease in purchasing power of a given currency over time, and an increase in cost of goods. This results in consumers buying fewer goods and services with every dollar they have saved. Can we predict inflation? How do we prepare for it? How can we rest at night with so little control over it?
We will break down these questions and elaborate on inflation’s causes and effects. Not to worry, MD Financial is here to help prepare you, protect your wealth and reduce your stressors from now into retirement. Our goal is to help doctors gain more time, more money, and less stress.
Let’s dig into some more finite details and questions revolving around inflation:
What is inflation?
Inflation is the erosion of purchasing power. It is key to consider when planning for retirement, but is a factor many DIY investors don’t calculate into projections.
What causes inflation?
There are many theories, but one commonly believed theory is our government’s approach to money. The current administration's approach is similar to the administration of the late 1970’s and early 1980’s. There has been some recent speculation that we may start trending toward higher interest rates in the near future, as we did then. During that time, interest rates for homes were ranging around 10-12%, as inflation increased.
A high interest rate on homes means that many buyers aren’t keeping up with inflation as they pay off their loans.
If you’re wondering about the long-term impact that this high of an interest rate can give, let us consider the “Rule of 72” for a moment. The “Rule of 72” is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return.* Take the above mentioned interest rate of 10-12%, divide it by 72, and you can see how long it takes to double your invested money in a house at that rate.
A rate of return (RoR) is the net gain or loss of an investment over a specific time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning to the end of the period.*
What will my money get me in retirement?
Your money, in general, won’t buy as much tomorrow as it can today. Here are a few examples of inflation with common products over the past 100+ years:
In 1916, 9 cents would buy you a quart of milk. 50 years later it could only buy you a small glass of milk. Now? 9 cents will buy you about 9 tablespoons of milk.
In US dollars. Source for 1916 and 1966: Historical Statistics of the United States, Colonial Times to 1970/US Department of Commerce. Source for 2017: US Department of Labor, Bureau of Labor Statistics, Economic Statistics, Consumer Price Index—US City Average Price Data.
Do wages keep pace with inflation?
In general, they do. But there have been times when they haven’t, and this can especially be true with doctors.
How can we protect ourselves?
Invest in stocks
Investing for the long-term means that even though the value of the dollar declines over time, investments can still outpace inflation and help grow wealth and preserve purchasing power.
60% stock/40% bond is what many pundits think is the preferred risk tolerance during retirement to keep up with inflation.
50 years ago, experts would have recommended a majority in bonds, but that just isn’t feasible anymore due to the rise of inflation.
Invest in residential real estate
This has historically kept up with inflation if you’re not buying and selling regularly, with investments being slightly above in some historical points.
TIP: For most residents and fellows, we don’t recommend buying a house, but if you are in a spot looking for a forever home, we are happy to assist.
Mortgage interest rates are low right now
If you have a mortgage and have not refinanced to the fixed low rates that are currently offered, do so today! This is a primary goal that should be accomplished over the next several months. The fixed rates that are currently being offered are some of the lowest ever seen, and will help hold the value of your home going forward.
In retirement, what are some changes to expect in everyday living expenses?
You don’t need to save in retirement
You may have a house paid for so there isn’t a constant mortgage payment
How do I know the amount of money I’ll need?
A common rough rule of thumb for figuring out expenses is to take your gross income pre-retirement plus living expenses, and divide it by two. The after-tax amount you need is half of your living expenses while working.
For example, if you earn $300,000/yr, you should plan for $150,000/year in retirement.
These rules don’t take inflation into account. However, MD Financial averages 3.74% inflation into their retirement calculations to provide additional protections to you and your retirement savings.
Historical inflation rates:
2.36% from 1990 – 2020
3.88% 1970 – 2020
Any other tips to combat inflation?
Actually, TIPS (Treasury Inflation Protected Security) is an alternative way to save and invest for retirement. They are guaranteed by the US Treasury and are considered to have low risk of default. TIPS are bonds; they are very liquid and are indexed to inflation to protect investors from an erosion of purchasing power. TIPS may not offer the long-term growth opportunities that stocks do but can be an effective risk management tool for those who are concerned about inflation.
Source - Inflation: The Insideous Thief, published by Kraken in June 2021.
Inflation will continue to impact you, your income, your purchasing power and the amount you need to save for retirement. Be aware and account for inflation within your savings plan. Doctors should not be concerned about inflation, as it is always something fluctuating and entirely out of their control, but they should absolutely meet with a financial advisor to help be prepared for it.
*Source: Investopedia.com
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To hear the original podcast, check out the Brown University page here.
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Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.