Gary Begnaud of New Jersey, an Executive Vice President/Wealth Management, Financial Advisor at Begnaud Wealth Management Group of Janney Montgomery Scott, LLC is designated a Chartered Retirement Planning Counselor ® as well as a Certified Divorce Financial Analyst® and has been serving clients for over 35 years. In the following article, Mr. Begnaud discusses how inflation could impact your retirement savings.
Gary Begnaud says that over the last year, inflation has pushed the cost of daily life roughly 40% higher than it was just 12 months ago. These rising costs are having a significant effect on just about every aspect of life, including financial savings, investments, and other less talked about sectors. Many retirees and employees approaching retirement age are now wondering how inflation will affect their savings.
Although inflation isn’t likely to reduce anyone’s savings, it will make them less valuable. For individuals with savings in a retirement plan, though, they may escape the damage and devaluation thanks to institutional safeguards. In this article, Gary Begnaud of New Jersey discusses some of the most pressing factors affecting retirement savings and whether inflation should be feared.
Inflation Will Make Retirement Savings Less Valuable
The biggest immediate threat of inflation to retirement savings is the devaluation of the dollar. Over time, inflation causes the purchasing power of the dollar to drop, making everything from common household goods to housing prices more expensive explains Gary Begnaud of New Jersey. This is a direct result of having too much cash in the economy without anything to back it up.
For example, if inflation is at 10% and you have $10,000 in savings, that money will only be worth $9,000 the following year. In other words, you’ve lost $1,000 in purchasing power, regardless of how much you have in savings. This effect can be very detrimental to retirement plans. Fortunately, there are some methods of safeguarding against this type of devaluation explains Gary Begnaud.
One common method is to invest in assets that are not as easily influenced by inflation, such as real estate or precious metals. Another method is to invest in stocks, which have the potential to increase in value along with inflation.
Inflation May Help Employees Approaching Retirement
Gary Begnaud of New Jersey says that while inflation can be detrimental to retirees, it may actually help those who are still employed and approaching retirement. This is because inflation traditionally increases the value of wages, which in turn increases the amount of money that can be contributed to retirement accounts.
For instance, let’s say that you make $50,000 per year and are able to contribute 10% of your salary to a 401(k). If inflation rises by 5%, your salary should also increase to $52,500. This means that you’ll be able to contribute an extra $500 to your retirement account, which can help offset the effects of inflation explains Gary Begnaud.
Of course, this only works if your employer doesn’t reduce your 401(k)-contribution percentage in order to keep up with the rising cost of benefits. Additionally, wages have fallen far behind the inflation rate over the past couple of decades.
Inflation May Lead to Higher Interest Rates
Inflation can also lead to higher interest rates, which can be good or bad depending on your situation. If you have money invested in a fixed-rate account, such as a certificate of deposit (CD), as your investments mature they can be reinvested at higher rates.
Gary Begnaud explains that if you have debt with a variable interest rate, such as a credit card or home equity line of credit (HELOC), then higher interest rates will mean that your debt will become more expensive to carry.
Higher interest rates can also affect your ability to get a loan. If you’re thinking of taking out a loan to buy a car or a house, for example, higher interest rates will increase the amount of money that you’ll have to pay each month.
This can cause a back and forth with your finances. Gary Begnaud of New Jersey explains that although you might save more from your investments, you could end up paying more on any outstanding debts. Therefore, it’s best to pay more than the minimum to reduce the debt as quickly as possible or risk losing a chunk of your savings.
The Bottom Line
Inflation can have a significant impact on retirement savings, but it doesn’t have to be all bad according to Gary Begnaud of New Jersey. Employees who are still working and contributing to a retirement account may actually benefit from inflation, as long as their employer is willing to pay them more and doesn’t reduce their 401(k)-contribution percentage.
Investors can also take steps to safeguard their retirement savings by diversifying their investments across a range of stable material goods. In the end, Gary Begnaud of New Jersey says that the best way to prepare for inflation is to cut out any unnecessary costs and create a budget that can weather the next few years until the laws of supply and demand bring inflation back under control.
Begnaud Wealth Management Group
of Janney Montgomery Scott, LLC
701 East Gate Drive, Suite 210
Mount Laurel, New Jersey 08054
gbegnaud@janney.com
(Member: NYSE, FINRA, SPIC)
