Start with questions about how much they're paying for things they need to live on today versus what they were paying 5 years ago, 10 years ago, etc. Asking questions about how much more they're spending this year vs. last year, then compare that with the inflation numbers the government puts out to see if their personal inflation rates is higher, lower or the same as what the government publishes. We'll illustrate the impact of different inflation rates could have on future spending. Once we've established how much more things cost over the years we'll model inflation in our planning software. Typically, we don't just assume a set inflation rate, we let our planning software use historical inflation rates and Monte Carlo estimations of what inflation could be and build their retirement income plan to efficiently handle expected inflation while having enough flexibility to better handle higher than expected inflation if it occurs.
I see many clients who underestimate how much inflation impacts their retirement. One of the most vivid examples involves a couple in their early 50s who thought they were sufficiently prepared for retirement at age 65. Initially, their numbers seemed good to them, but they had really not factored in properly how those figures would be deflated by inflation over time. I helped them understand this impact by making a very detailed projection of their retirement income and expenses, which were all increased by an average annual rate of inflation of 2.5%. We compared that against their original plan, which had not accounted for inflation. The difference was rather eye-opening for them. That is, what they thought would be enough in monthly income of $5,000 in today's dollars would actually need to be closer to $7,000 in 15 years just to maintain the same standard of living. We've then discussed ways of reducing this impact by increasing their current savings rate, changing the investment mix with a view to outperform inflation, and working a few extra years to enhance their savings. We have also discussed the importance of maintaining some exposure to growth assets during retirement to help the portfolio keep up with the rising costs. This was indeed an exercise that would help them not only understand the real challenge of inflation but also take proactive steps in securing their financial future. It highlighted the importance of regular plan reviews and adjustments in keeping their retirement strategy robust against such a silent threat.
One instance involved a client who was concerned about how inflation might impact their retirement savings, particularly given their significant investments in traditional assets. We analyzed their portfolio and demonstrated how inflation could erode the real value of their savings over time. To address this, we discussed the benefits of incorporating gold and other precious metals into their IRA as a hedge against inflation. By reallocating a portion of their portfolio into gold-backed assets, we were able to provide a strategy that not only protected their wealth from inflation but also positioned their retirement plan for long-term stability and growth.