“Everything screams inflation,” the Wall Street Journal wrote last summer.

Indeed. By the end of 2021, inflation—the year-over-year change in consumer prices as measured by the U.S. Bureau of Labor Statistics—had surged 7%. That was the biggest annual inflation increase since 1981.

But worry not. This essay is neither a tale of woe nor an intricate guide on how to protect your portfolio from inflation.

Rather, this is a cup of comfort—a reminder for retirees why it’s okay to spend a little more when inflation creeps upward.

Overcoming Fear of Inflation

Inflation has been called the “silent killer” because of its very real, yet somewhat hidden, impact on prices.

Inflation acts as a constant headwind—particularly for retirees—in reducing the amount of goods and services a fixed income can buy.

Consider one gallon of gas. The average cost in the U.S. in 1970 was just 36 cents. Today, it’s more than $4.00. Also increasing, however, has been the general standard of living—incomes, asset prices, and improvements in the quality and breadth of goods and services.

In this regard, modest inflation is simply a natural part of economic growth.

What’s most important for retirees, then, is to ensure their portfolios and disposable income keep pace with the general rise—and occasional spikes—in consumer prices.

Portfolios Designed “For This”

It may be worth a quick reminder that—for our clients, at least—Vista portfolios have already been constructed for “times like this.” As we wrote last summer, typical portfolios include diversified and global exposure to stocks, real estate, and bonds.

While stocks can be volatile in the short run, they’ve historically offered the best long-term protection against inflation—high positive returns.

Real estate (via publicly traded REITs) has also historically been a good long-term hedge against inflation as higher building replacement costs support increased property prices.

Treasury inflation protected bonds (aka, TIPs) are perhaps the purest form of inflation protection, offering a “real return” tied to actual changes in the consumer price index.

While any of these asset classes will occasionally disappoint, each plays an important role in combating the impact of inflation.

Can I Maintain My Quality of Life?

For those concerned about being able to live as expected when inflation spikes, take heart.

From the outset, our clients’ financial plans have carefully considered both historical inflation and a variety of future inflation scenarios. For example, our planning frequently assumes higher annual inflation for future expenses such college tuition or long-term care than a home purchase or charitable gift years ahead.

The upshot? Vista plans are designed with the explicit assumption that clients want and need to increase their annual withdrawals to keep up with inflation.

While current inflation might seem alarming, keep in mind general price increases have been relatively low over the past decade. Even after including last year’s 7% surge, inflation has averaged just 2.14% over the past ten years. That’s a good deal lower than the 2.9% average rate of inflation since 1926.

Why does this matter?

If you’ve been increasing your portfolio withdrawals each year to keep pace with inflation, those annual adjustments have most likely been much lower than what has already been factored into your spending plan.

In other words, a larger increase this year may just be a catch-up for lower past increases.

Live, Don’t Underlive, Your Life

So, what’s the right amount of inflation adjustment for 2022?

Some clients may find their checking account balances fuller than normal, after another COVID-induced year of less travel and eating out. For those folks, keeping portfolio withdrawals the same as last year—despite our encouragement to live your life fully—might feel about right.

Others might continue taking comfort in the consistency of taking a 3% increase each year, which approximates the historical rate of inflation. Others still will have more distinctly felt the past year’s price increases and want the 7% bump to maintain purchasing power.

Regardless of the number, know your Vista team is here to help you evaluate the best inflation increase for you.