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What Issues Should I Consider When Dealing With High Inflation?

Updated: Jun 5, 2023

High inflation has been on everyone’s mind, and many are wondering what they can do to take action. With guidance, clients will be able to explore ways to address high inflation and set their financial expectations appropriately.

This checklist covers key issues to consider when dealing with periods of high inflation, such as:

  • The impact inflation may have on our client’s cash flow and budgeting.

  • The effects of inflation on our client’s assets, and solutions that may be considered to mitigate those effects.

  • Certain tax planning ideas may be relevant to your client in light of high inflation.

  • Other miscellaneous areas of our client’s financial plan may be affected by high inflation.

Inflation has become a prevalent topic of discussion lately, causing concerns among individuals about how it will affect their finances. With inflation rates reaching their highest since 1981, it is crucial for individuals to take proactive steps to mitigate its impact. In this blog post, we will explore four key areas affected by inflation and discuss strategies to address them effectively.

  1. Impact on Cash Flow and Budgeting: The first step in managing high inflation is to reassess your living expenses and update your budget accordingly. Consider accounting for personal expenses that have changed relative to inflation and adjust your emergency fund to provide a cushion against unforeseen circumstances. Look for ways to save money, such as opting for annual payments instead of monthly ones and purchasing staple goods in bulk. Anticipate price increases for planned purchases and explore the possibility of accelerating them to lock in a lower price.

  2. Managing Earnings: In a high inflation environment, it is essential to ensure that your earnings keep pace with rising prices. Explore options to increase your income, such as negotiating a raise, switching jobs for better compensation, developing new skills, or pursuing additional credentials. Consider turning a hobby into a potential income source or exploring a side hustle. If you are retired, keep in mind that Social Security benefits have a built-in cost-of-living adjustment (COLA) to offset inflation. Additionally, purchasing an annuity or reviewing and adjusting your existing annuity can help safeguard your retirement income.

  3. Asset Allocation and Debt: Review your asset allocation to determine if it is appropriate for high inflation. Consider increasing exposure to equities and other asset classes that have historically performed well in inflationary periods. Be cautious about holding too many long-duration bonds, as they can be subject to higher volatility when interest rates rise. Explore alternatives like I-bonds and CDs to protect your investments from inflation and mitigate interest rate risk. Additionally, review your debt portfolio, especially variable interest rate debts, and assess the potential impact of inflation on interest rates. Paying down variable interest rate debts or refinancing them to fixed rates can help manage this risk effectively.

  4. Tax Planning: Inflation can have significant implications for taxes and your overall financial plan. Work with a qualified CPA or tax planner to understand how inflation may affect your tax bracket and effective tax rate. Explore tax strategies, such as harvesting short-term losses, favoring pre-tax or Roth contributions, and considering Roth conversions during periods of high inflation. Stay informed about areas of the tax code that do not receive inflationary adjustments, such as Social Security taxability, the Net Investment Income Tax (NIIT), and State and Local Tax (SALT) limitations.

Managing high inflation requires careful consideration of various aspects of your financial plan. By reassessing your cash flow, exploring ways to increase income, reviewing asset allocation and debt, and implementing tax planning strategies, you can better navigate the challenges posed by inflation. Remember to seek professional advice and develop a long-term plan tailored to your specific circumstances. By staying proactive and adaptable, you can safeguard your financial well-being in an inflationary environment.

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