Mid-Term Elections – Plan For More Inflation?

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?

Image Credit: Pixabay

7 thoughts on “Mid-Term Elections – Plan For More Inflation?

  1. Great thoughts on retirement planning and inflation. This is why I do not invest too much into the financial market but prefer tangible assets. Whether inflation/ deflation/ hyperinflation or none of that (stagnation), tangible assets (like real estate and rental income) will move with the economy and interest rates. I am hedging any currency risks (rental income in exotic currency: PLN) by developing two online businesses on the side and keeping my skills sharp as well as my network from my MegaCorp life. You can never plan for everything but at least you can stay prepared.

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    • I’ve been meaning to look into diversifying into real estate, but don’t really know anyone who does a lot of it. I’m always more comfortable having someone to learn from.

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      • There are quite a few FI bloggers sharing details on US and Canadian real estate. I can help with Poland/ Australia/ Singapore/ Germany only as this is where I know a little bit more and have in depth knowledge now about investing in in RE in Poland. Shout out if you want to connect sometime, happy to walk you through the main cost Drivers/ investment decision criteria which I have established. The principles are the same, local knowledge on the legal and taxation side varies country to country significantly and is ever evolving, too. Since RE is a capital intensive investment vehicle I would read up a fair bit and connect with the practitioners for early guidance.

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  2. Everything about my investment portfolio is designed to be: Long-term; Widely-diversified; Capital-preserving. My advisor characterizes it as Conservative. My goal is to maintain purchasing power over time. Therefore, I keep inflation at 3%, even when it is lower. When inflation is lower, I’m ahead of the game. That helped as the past decade has gone by, because my actuarial time-horizon decreases each year. When inflation reaches 3%, I’m at par. Above 3%, I will need to recalculate. The only thing we can be sure of is that government will keep taking more money, spending it inefficiently and ineffectively, regardless of which ruling party is in power at the time. America is in a deep hole, with no signs of trying to change spending. Eventually, there will be no more road to kick that can.

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    • A 3% assumption certainly seems safe in the environment we have been in and the way the Fed has pledged to try to manage to 2%. Then again, if we start trusting the government, we are always taking a big risk! 😉

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  3. I think it’s pretty bold to say neither party cares when a previous Democratic administration balanced the budget and the one after that had a near depression to address and followed Keynesian principles to avoid lapsing into a depression. I think you need to be more accurate about which party is worse for deficits.

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    • Let’s see … Clinton grew the debt by 32%, GWBush by 100%, Obama by 100%, and Trump’s off to a fast start. That covers 26 years and our debt has grown ~500% in total during that stretch. Clinton came the closest to balancing the budget ($18B deficit in 2000), but never actually did balance it in 8 years. No, I don’t think it’s bold to say I don’t see a lot of ‘care’ in either party when it comes to spending restraint.

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