We are living in very interesting times. The demand destruction caused by COVID-19 in areas such as sporting events and conferences, where demand can't be recovered is huge. However, areas, where demand is only delayed due to global supply chain disruptions, are creating inflationary pressures.
At the beginning of the summer, I started pricing lumber for a new deck. By the time I actually bought the lumber, which was difficult to find, the price had increased by over 30%. This increase was caused by a couple of factors. With many working from home and not spending money on travel, the demand for long-overdue home improvement projects has increased. Add to this, the reduced supply of lumber mills and treatment plants not being able to operate at full capacity due to COVID-19 workplace restrictions and lockdowns.
Around the globe, the cost of doing business in this “new normal” is going up and the only way for some businesses to survive is to increase prices. Can you imagine arriving at your planned retirement date, only to discover that you forgot to budget for inflation? Everything costs more than you planned for. The results would be dreadful, wouldn’t they? To fund your retirement you would have to hold a part-time job, sell your house, accept a less attractive lifestyle or a combination of all three.
It is the rising prices caused by inflation that are problematic for savers and investors. There is a tug of war. Why invest money at an interest rate that is less than the rate of inflation? The goods and services you are saving up for will only be more expensive in the future. Are you better off spending all your money today? Or should you invest in assets that will grow faster than inflation?
Going into retirement house-rich and investment-asset-poor won’t work. You need retirement savings to provide a steady income that has to last a long time. So, don’t pay off your house until your retirement savings are fully in place and secure. But where should I invest?
Interest rates are so low today that to stay ahead of inflation, investors are being forced to look towards the volatile stock markets to try and get a better return on their savings. This is great if you are young and have time on your side, but if you are at a stage in life where you can’t afford to take risks with your retirement savings, you need to have some type of portfolio insurance in place.
The global stock markets have always been volatile, but even more so today as the world is adapting to the “new normal”. Being able to withstand the ups and downs of the stock market may be too much for senior investors unless they have some sort of diversification strategy and plan for a steady stream of monthly income.
Financial markets can create a great deal of wealth over time, but the rules of investment have changed over the past 40 years.
This is a great time to start rethinking your financial planning process. Investors need to think about broader choices today when building their portfolios because we are not dealing with the same type of conditions we’ve seen over the last 40 years. You need a combination of investments that work well together in this low interest rate environment that are tax-efficient and provide downside protection.
You only retire once, and doing so in a time when the cost of living is rising and the investment landscape is volatile and uncertain can be extremely stressful. So, there are a few things you can do today to prepare for a long and prosperous life. You can save more and spend less, and have a disciplined investment strategy centred on diversification and protection of capital.
Consult a licensed financial planner or financial advisor to help navigate your options, and then you can enjoy life & have fun.
About the Author
John Niekraszewicz (Nick-ra-shev-itch) BMath, FCSI, CFP, FMA is the Certified Financial Planner specializing in Wealth & Estate Planning that is responsible for the AHIP Association Health & Dental Plan provided by JVK Life & Wealth Insurance Group. John is also the Principal of JVK Life & Wealth Advisory Group - provider of mutual funds and investments. John welcomes your questions and can be reached at 1-800-767-5933 or firstname.lastname@example.org
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