“Although deflation is historically a less common occurrence than inflation and tends to be less erosive to retiree wealth, those who still have a few years before retiring should take adequate precautions.” Tim Davis, CLU, CEBS
There is a lot of justifiable concern surrounding inflation, especially in the wake of the COVID-19 pandemic. Indeed, inflation is of high concern because, while it impacts every American, it can be particularly devastating to retiree wealth.
Now, though, some economists warn that deflation, rather than inflation, may turn out to be the factor that sends our economy into a downward spiral in the coming years.
Deflation occurs when asset prices, along with the prices of consumer goods, decrease over time. This situation increases purchasing power because in a deflationary situation you will be able to buy more goods and services with the same amount of cash.
At first blush, deflation seems like it could be a good thing. I mean, who doesn’t want to be able to buy more goods and services using fewer dollars? Historically, though, deflation often portends tough economic times.
Deflation is something of a mixed blessing in that it does not affect all groups equally. For example, the falling prices associated with a deflationary period might actually be beneficial to those who are already retired and have no debt.
Deflation and the pre-retiree
For those of us with a few years to go before retirement, deflation and the attendant glut of goods and services dumped into the market may make life more challenging. When consumers see prices going down, they tend to delay buying things they think they will be able to get later for less money.
It’s when people put off spending that problems in the economy emerge. Deflation is often accompanied by collapses in the stock and real estate markets. Market downturns result in lowered wages and layoffs.
Since those who lose wages typically reign in their spending, the result is that companies sell less of their goods and services. This lack of demand can often cause prices to trend downward, even more, resulting in even more layoffs and other cost-cutting measures as companies struggle to stay afloat. The economic expansion comes to a dramatic halt.
How can those 5-10 years from retirement hedge against deflation?
While deflation has the potential to send your retirement plans sideways, there are a few things you can do now to blunt the impact.
Get rid of as much debt as you can. A deflationary economy means cash is worth more going forward. During deflationary times, the money supply is tighter, and this creates an increase in the value of cash. A lot of debt, such as mortgage and loan payments, is fixed. So while prices are falling during deflation, the cost of servicing your debt remains the same. This increases your debt levels, making them harder to pay off.
Make your emergency savings account a priority. If you are still working, be aware that an economic upheaval due to deflation could mean that you lose your job or experience a reduction in pay. Try to put at least six months of savings into an emergency fund to help you make it through a layoff or reduction in work hours.
Get proactive with your finances. Now is a good time to partner with your advisor and regain control of your money, look for gaps in your retirement blueprint, and discuss how to rebalance your current portfolio as you contemplate both inflation and deflation. Discuss making changes to your portfolio, perhaps adding more investment-grade bonds or safe money products such as annuities.
Become your company’s ESSENTIAL employee. If possible, up your game at work. If your company has multiple departments or divisions, see if you can cross-train in other areas. Offer to take more shifts or change your schedule, learn new skills, represent the company at events and meetings, or take on other responsibilities. Employees viewed as the glue of the company stand a much better chance of surviving layoffs.
Summing it up:
While inflation is always a concern, many economists believe that deflation could become a problem for those still working, in spite of the traditional resilience of the U.S. economy.
Americans hoping to retire within 5-10 years should be especially vigilant when it comes to possible deflation. They should meet with their planners regularly to ensure they have the right mix of products to weather both inflation and deflation and includes safe money products. Bottom of Form