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Wealth Planning Commentary

Wealth Planning Commentary – February 18, 2025

February 18, 2025

Navigating Inflation

Inflation remains a concern, holding steady at 3% (U.S. Consumer Price Index, February 2025). Given this persistence, the Federal Reserve is unlikely to lower rates aggressively. While this may feel unsettling, it is important to put the numbers in perspective. The 50-year average inflation rate before 2022 hovered around 2.3%, but now it appears to have settled closer to 3%—a new normal rather than a crisis.

From a planning perspective, this shift has implications, particularly for retirees. The overall cost of living will continue to erode purchasing power over time, meaning withdrawals from retirement funds may need to be slightly higher than anticipated. However, for many near or in retirement, a long-term inflation rate of 3% to 4% is unlikely to significantly impact financial security. The real risk isn’t inflation itself but rather consistent overspending and withdrawing large sums at inopportune times, such as during market downturns.

Unlike market volatility, inflation is harder to hedge directly. The best defense is entirely within your control – clearly understand your spending needs and maintain the flexibility to adjust when necessary.

But some costs are not uncontrollable. Medical expenses remain one of the most considerable unavoidable costs in retirement, and healthcare inflation is likely to continue rising at around 5.5%. While some cost-saving strategies exist, healthcare in the U.S. commands a premium, and these expenses should be factored into long-term planning.

A proactive approach to inflation involves reviewing your plan annually and maintaining adequate liquidity, typically one to two years’ worth of expenses in cash or cash alternatives or a combination of this and a line of credit. With these safeguards in place, inflation (within reason) should not be a significant concern.

Please get in touch with your Wealth Manager with questions about how inflation might affect your plan.

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