The Impact of Inflation on Your Personal Economy State of Affairs

Yesterday’s news was ugly, really ugly! Inflation rose at a year-over-year rate of 8.5%. Core inflation (food and energy removed) rose at 6.8%. These are the highest in 40 years.

So what happened at that time? Jimmy Carter was President. He was relieved of his duty by Ronald Reagan. Double-digit interest rates, great for savers and horrific for borrowers, saw interest rates begin to track downward during the latter’s two terms. The prime interest stated by The Federal Reserve was 21.5% in 1981. By the end of 1989, the prime was down to 10%, and everyone thought that was a bargain. Fortunately, rates went down from there, and the US economy took off.

So here we go again. The Fed has announced as many as seven, possibly eight interest rate hikes over the next year. Today the prime is 3.25%, and many think the sky is falling. If the Fed raises rates a quarter-point on each hike, we would see the prime at 5.25%. This is the base rate upon which mortgages and credit cards are based. This makes purchasing a home or refinancing harder. First-time home buyers would face the double jeopardy of higher mortgage rates and higher prices on homes for sale, given the enormous inflation in real estate, at the same time. Not good!

As bad as this situation is for Millennials, it will be brutal for Baby Boomers retiring. Studies indicate that most Boomers anticipate working longer before retiring, working part-time in retirement, or never retiring. It is worthy of note that the government has seen this coming. Social Security full retirement age was pushed to 67 as that social benefit approaches bankruptcy, and Required Minimum Distributions from IRA’s were pushed from 70 ½ years of age to 72. Why? Because the government realizes that these resources must go farther since Boomers are living longer, and financial conditions are such that it will be imperative to stretch every dollar to maintain a lifestyle and avoid financial conditions similar to the Great Depression. Add to that what most feel will be higher tax rates to offset an enormous deficit, and the forecast looks tough.

What can you do? Play the long game!! Consider living in less expensive areas of the country. Eight states are income tax free. The cost of living in some states may be 20% or more, less than in California or New York. Be a prudent buyer and investor. Online car dealers are an example of one industry’s response to reducing the cost of goods. Look for innovation to reduce expenses in real estate, medicine, education, and many others.

Perhaps most importantly, immunize your tax return. Build tax-free cash flow sources NOW!! Whether rates go up a little or a lot, zero tax is zero tax! You will use fewer gross dollars to produce the after-tax cash flow necessary to maintain your lifestyle, and possibly reduce your tax bracket on your taxable cash flow. A few tax-free income sources include Roth IRA’s, Life Insurance Cash Values, and Municipal Bond interest. Speak to your financial advisor about these and use tax-loss harvesting to neutralize taxes on long-term capital gain income by offsetting these with long-term losses accrued over time.

Lastly, the new kid on the block is The Charitable Payraise™. This unique new financial method enables a retiree to create an additional source of tax-free cash flow while helping charity at the same time. The strategy combines the benefits of donations to a charity with the tax treatment of loans, which are tax-free, (exactly the same way loans from life insurance cash values are treated). This dynamic new approach maximizes the after-tax cash flow on the sale of appreciated assets such as securities, land, investment property, collectibles, and even employer stock held inside your retirement plan (NUA).

By utilizing TCP alongside the other sources of tax-free cash flow mentioned above, retirees can make their hard-earned dollars go further and improve their quality of life in the ‘Golden Years.’

For more information on these speak to your financial adviser and/or reach out to us at The Charitable Payraise™ to discuss your situation and see if you are a candidate for this revolutionary new strategy.