Transcript:
Easan Arulanantham:
So our next question is kind of like a hot topic, everyone, everyone’s feeling it whenever we go to the gas pump, we are feeling it now. But what is inflation doing to my retirement? And how does it affect my chances?
Tom Vaughan:
Yeah, surviving inflation, says that’s what’s been a hot subject. Again, we bring this up from the client, you know, strategy sessions that we have, it’s coming up a lot, for obvious reasons, people are seeing, you know, the gas and food and you know, just about everything costing more than it used to. And there’s a lot of different ways of surviving inflation and fighting inflation. And dealing with inflation, we could do a five hour show just on this part, I’m going to focus on one piece that I think is really interesting. And that is somebody who is quite conservative with their investing, because they’re afraid of the stock market dropping, right? And you know, how they’re now being affected by inflation and what they might need to do, you know, in that regard. So, I mean, I’ll give you an example here, we’ll give a view here. So here’s a, here’s a current allocation for a hypothetical client 30% stock, right. So my conservative clients are 3020 10% stock, right? That they’re kind of in that category. And their biggest concern is just losing to a big stock market crash, right? The problem is, there is another risk, and that is losing to inflation, they haven’t had to face that risk for ever, it’s been a really long time, we’ve had very, very low inflation. And now all of a sudden, we have very high inflation, and they’re having to face that risk. And so you know, yes, your might be avoiding the stock market downturn, but then losing out basically, day after day to inflation. So I’ll show you how this works, and give you an idea of where to go through a financial plan with this person.
So first of all, we would take a look at this particular person with this portfolio. And we look at their basic MonteCarlo simulation. And so this is a huge part of our retirement planning, toolkit, so to speak. And what we’re going to do here is I’m going to push this button, and it’s going to allow the computer to randomly select amongst all the variables, what’s the inflation rate to what’s the stock market, doing the bond market doing all the different variables that fit into this? Inside the plan, we already have this person’s assets, you know, how much they’re spending, how much they have coming in from outside assets, like Social Security and pensions and such. And we want to see does it work? We’re going to run it 1000 times and see if it works, I’m going to, I’m going to push the button here. And we’re going to see, you know, this Monte Carlo simulation come up. There it goes. And so we get this green spaghetti. And this is a good one. Yeah, I mean, 99% probability success, that’s as good as you can get using Monte Carlo simulation. And it basically says that, you know, under this base base case scenario, really good chance of making things work as far as that goes. But we can stress test this. And so one of the stress tests is a higher inflationary environment, a persistently higher inflationary environment. So let’s just go here. So here, we have higher inflation. With that current 30% portfolio, we already at 99%. But what happens if we increase the base inflation rate here, from three and a quarter to five? So I was going to do that. And we’re going to see what happens with the MonteCarlo simulation. So right now you can see it’s calculating, it’s running through 1000 times.
Easan Arulanantham:
Yeah, I wouldn’t want to be retiring on 66%. That’d be really rough.
Tom Vaughan:
Yeah, that would, that would scare me, honestly. And so here’s the irony, there’s a client who’s scared of losing money in the market, who in higher inflationary environment would actually have a pretty good decrease in standard of living, in order to make it through. So one of the options and there’s lots of options right on how to fight this, and I’m just presenting one simple piece here is the possibility of increasing the stock component. I was just meeting with a client the other day, and we kind of broke down, you know, the returns for the last three years from the stock market returns for the last three years for the bond market, and the stock market was significantly higher on average rate of return. And you know, maybe that doesn’t happen the next three years, it’s hard to say. But long term stocks have done a really good job of keeping up with inflation. And so that’s why we have them. And so if we go now to another scenario here, where we just increased their allocation to 60%. Now, that’s hard to do when somebody said 30, go to 60. And so maybe you work up to it slowly, but surely. And this is one part of the plan. I’m trying to fight inflation. So let’s see what happens. Now. When we go to 5% inflation. I’m going to slide this over. And there we go. And it’s going to calculate another 1000 times and see what happens. Okay, we just moved up to 81%. Right, so we’re in the green zone. Not perfect, not at 99 but not Bad, I’d feel much more comfortable there as far as that goes. And so anyway, that’s one of the strategies for dealing with inflation, especially if you have a low exposure to the stock market is to consider some increase in that exposure, just in case we do continue to have these things happening.
Easan Arulanantham:
Yeah, the one thing is, we want you to be able to sleep at night, a good adviser gets you into a spot where I’m not worried about my finances, I have a good plan in action, I know where I’m going to be. And so we don’t want to bump your stock allocation up too much that it’s too volatile, and it’s keeping you up at night. But we also don’t want you to have inflation eating away at your plan. So you’re also not sleeping at night. So there has to be a healthy middle ground there.
Tom Vaughan:
Yeah, exactly. That’s exactly it. It’s a matter of balancing risks. It always is. Right. And, and understanding, right, the more you understand, the more you have. I mean, I just gave positive Friday, you know, for my summary this this week. And so the more you understand the positives and the negatives of the market, because I think a lot of times when I’m talking to somebody who’s very nervous about the market, they just have too many of the negative pieces in their mind, and not enough of the positive pieces in their mind. And so, you know, it drives them down and down and down in terms of their stock market exposure. And again, it’s higher exposure isn’t for everybody, but this it is a it’s a challenging situation with inflation for people that have low exposure. So anyway, that’s what’s going on there.