At varying ages and stages in life, people experience the impact of inflation at different rates. These varying rates of inflation and their subsequent expenses have a direct impact on the income needed from an investment portfolio. They must be accounted for within a holistic wealth management plan to ensure a successful outcome.
The phenomena of experiencing the impact of inflation rates at varying stages of life is primarily observed through lifestyle expenses. For example, the inflation rate for a young couple, just starting out, is most often higher than a couple well into their retirement years. This is due to the fact that a young couple’s lifestyle expenses will be increasing at a more rapid rate as their lifestyle may include activities such as starting a family, purchasing a home, and sending their children to college. These different levels of spending directly impact forecasting during the financial planning process.
Great emphasis must be placed on understanding the goals, desires, and aspirations of clients through the different stages of their lives to properly address evolving and ever changing lifestyle inflation. This emphasis is critical if your wealth is to be used as a tool to accomplish what is important to you.
Far too often, lifestyle inflation assumptions are made just once and revisited only when the date of retirement is near. This can lead to a wealth management plan that does not align with your current life stage and one that cannot generate the income needed to maintain your lifestyle. To avoid this pitfall, at CCM we recommend four related best practices:
Review and update your goals through different stages of life.
You should take time annually to reflect on your current situation and envision the lifestyle you desire during the next 5-10-15 years. From just starting in your career, to building a family, to sending kids to college, to anticipating retirement, to increasing philanthropy — different stages of life bring different expenses. Regularly reviewing goals and working with your CCM advisor to update your financial plan accordingly is critical.
Place financial markers alongside goals.
Placing financial markers that correlate with goals allows you to quantify a goal’s expense and set a course for achieving that goal. In doing so you are able to tangibly and accurately forecast whether or not you are heading in the right direction. You are then able to determine if any changes must occur either from a savings, spending, or investment model standpoint.
Monitor and review the amount of risk that is required.
After outlining goals and placing financial markers you are able to determine the required investment risk that must be taken to accomplish these goals. Simply, this is the rate of return that must be achieved over the course of your financial plan. By knowing what return you need we are best able to partner with you to to determine the appropriate allocation to stocks and bonds.
Look beyond investment performance.
Quality investment management is critical for a successful wealth management plan but it is helpful to look beyond performance.We encourage clients to look at why they are investing. Wealth is a tool to accomplish what is important to you and by knowing why you are investing, you’ll be able to determine if your portfolio is helping you accomplish your goals.
Of course, your CCM Advisory Team is here to help and guide you through all of these steps. Awareness of the importance of these activities as related to “lifestyle inflation” and the subsequent expenses will help ensure that they are reflected in your comprehensive financial plan.