Click here to learn more about our financial professionals by visiting FINRA's BrokerCheck.

An Economic Time Bomb

| June 05, 2023

There’s potential danger lurking in the economy that could very easily cause you to run out of money during your retirement, even if you have planned well.  It’s inflation – a potential economic time-bomb and I believe it’s more of a threat than many people realize.  If it persists, it can severely damage the economy and wreck retirement for large swaths of people.

I am a Financial Planner by profession.  One aspect of the profession involves the practice of looking into the future to see if the multiple projections and assumptions involved in financial planning will work-out well for a client.  A central component of the planning process involves an assumption about how quickly prices will rise.  One of the most comprehensive sources regarding inflation as well as many other US economic indicators is contained in a document called the Matrix book.  It comes from a firm called Dimensional Fund Advisors and it says that for the past 20-years, ending in 2021, the U.S. Consumer Price Index was 2.3%, but in 2021 it was 7%.  Typically, the financial plans my partner and I create assume a 3.5% inflation rate. What that means is, based on the 20-year average, my clients normally should be just fine, because our assumption is above the 20-year historical rate.  Here’s the problem – what if inflation remains unusually high, say around 6-7%.  What happens is, a plan that’s successful could fail and that means, a client who had every expectation of a comfortable retirement could very easily run-out of money.  That’s the reality which makes it potentially stark and economically dangerous.

My partner and I have examined more than a few financial plans with normal inflation numbers, then changed them to reflect current inflation rates.  More often than not, each time we’ve adjusted the rate to current levels, the plans fails.  What that means is, unless the people running the country get real about reducing inflation, there could be many people who find themselves running out of money in retirement.

This is not meant to be a political discussion.  It about math and the competence of the nation’s leaders.  Treasury Secretary Janet Yellen said in May of 2021, “I doubt that we’re going to see an inflationary cycle.” How was it possible for her to say that?  All the ingredients for inflation were there, particularly the order of magnitude regarding federal government spending compared to tax receipts.

The 2022 Office of Management and Budget report indicated that tax receipts for that year were 4.71-trillion dollars.  Federal spending for that same year was six-trillion-dollars, leaving a deficit of roughly 1.84-trillion dollars.  Add that to the hitches regarding the supply of goods and voila, the recipe for inflation.  It’s simply a rendition of the theory of supply and demand – too much money chasing too few goods can cause prices to increase.

Then there’s this – the continuing deficits added to the actual U.S. debt, which is now roughly 32-trillion dollars.  That’s the amount that the federal government owes everyone who’s loaned the United States money to run the government.  Higher than normal inflation usually causes the federal reserve to increase interest rates as a way to reduce inflation, but that increases the cost to finance the massive U.S. debt.  Once again, this is not a political discussion, this is the present economic condition and if you truly want to get a jolt of reality, just go to usdebtclock.org, where you can see the U.S. debt increasing by the second.  One thing to remember as you watch the debt clock tick higher, a deficit reduction is not a debt reduction, it simply means that the additional debt in one year is less than for another, but any deficit spending increases the national debt.

Bottom line, the Treasury Secretary was either blind to reality or not truthful.  Neither one is helpful and she’s supposed to know better.  What this all means to Americans is simply this – unless we elect politicians who understand the problem and commit to fix it, everyone is potentially in a world of hurt.