The economy is performing about as well as one could hope at this point in time, but you wouldn’t know it to watch political ads on TV. Despite quarterly GDP growth reaching 4%, the S&P 500 up +30% over the last two years, the unemployment rate at 3.9%, and consumer confidence approaching all-time highs – every political ad is full of gloom & doom.
Despite this, I’m not sure how much the midterm elections really mean for jobs, taxes, or health insurance on a national level. Most polling data suggests that the Democrats have a potential path to controlling the U.S. Senate, while the House of Representatives is likely to stay in control of Republicans. That means that little legislation may get passed in the next 2 years.
One issue that may get focus in a split-party Washington DC might be a Federal Infrastructure bill. This has been talked about as a bipartisan bill for the last few years. While better roads & bridges may seem like a good thing, it won’t be if it swells Federal spending.
Despite the strong economy, the deficit has grown over 30% to about $900B in 2018 – the highest it has been in 6 years (exacerbated by the recent GOP tax reforms). This ARTICLE from Reason.com – a conservative think tank – speaks to how high the worrisome Federal deficit has grown.
Since neither party has been serious about reducing deficits or controlling the national debt for a very long time, I expect that the unfortunate outcome of the midterm elections is likely to be more debt – and as a result – higher inflation. Consumer Price Inflation has been rising for the last 24 months and is likely to end 2018 near 3% (it was 2.7% through August).
As a result, the Federal Reserve has been inching up interest rates as a way to help combat inflation. Their long-term goal is to keep inflation at about 2%, but the inflation has been creeping up faster than they have been able to react to it.
As the mid-term elections approach, I would suggest that early retirees or prospective retirees work higher rates of inflation into their early retirement plan estimates. I think you will be surprised to see how much of a difference even small jumps in inflation impact your retirement spending projections.
When I look at our estimates, we need to have savings of 15% more (or cut spending by that amount) to accommodate an inflation trend just 0.5% points higher than the 2.5% we have currently projected. That’s a lot of money over a 35-40 year retirement and you will want to build some buffer in your nest egg just in case things trend that way.
How are you thinking about inflation in your retirement plans? What inflation rate do you have built into your base projections?
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