Brandy Auterson:
It’s now time for For Your Money. We’re joined by James Nelson, financial advisor at Nelson Corp Wealth Management. Welcome back, James.
James Nelson:
Thanks Brandy.
Brandy Auterson:
We have talked a lot recently about how inflation is impacting financial markets. For retirees, there are considerations beyond that. Could you talk to us about that?
James Nelson:
Sure. Most of the conversations regarding inflation center around how they affect stock and bond prices, and while that’s a worthwhile discussion, it’s a little bit more nuanced for retirees. Inflation not only impacts their assets that they may be invested in, but also how much money they can spend. Som in our industry, there’s considered the 4% safe withdrawal approach, which means a person can spend 4% of their account value per year, adjusted for inflation and over any 30-year period of time, they would make out just fine. They’d have their lump sum left over and they would’ve spent that cashflow throughout the years. So, we’ve got a chart here that kind of illustrates this and helps kind of drive home the point. What we’re looking at here is the S&P 500 ranging holding periods over a one to 30 year period of time.
James Nelson:
So, the yellow line there in the middle is the long-run stock average of about 10%. The blue line is the best returns in a given period of time. So, that one-year holding period on the far left of the chart shows that it was nearly 60%, and then as we move throughout the years, you can see it gets closer and closer to the average. Now on the flip side, we’ve got the red line, which again, shows the minimum annualized returns over a period of time. Again, starting in the left, it starts out about a negative 45% one year, and then as we move through time, that gets closer to the average as well. So, the blue line is representing a 12% average. The red line is representing an 8% average over that 30-year period of time.
Brandy Auterson:
So, how is inflation able to have a significant impact on this type of analysis?
James Nelson:
Yes. So, most people see that chart and they say, “Well, eight to 12%. Why can I only spend 4% of my account value?” The answer to that is inflation. So, inflation has really chipped away at returns, and we’ve seen that especially this year. Typically, inflation’s running at two to 3%. That doesn’t sound like a whole lot, but over a long period of time, two to 3% can really add up. So, that’s a huge concern. The other thing is that people view a stock market decline as one of the biggest risks in retirement, and while that is a serious threat, inflation is probably right there with them as far as a threat they should be considering as well.
Brandy Auterson:
If you missed any of our discussion, we’ll make it available for you on OurQuadCities.com.