On Friday, December 15th, our local ski area – Snowmass celebrated its’ 50th anniversary with the opportunity to purchase lift tickets for $6.50.  Today’s price of an advanced purchased ticket is $135.00, reflecting a 6.25% rate of inflation in the price of a Snowmass lift ticket.

This illustrates the importance of incorporating inflation into our financial planning goals.  The price of all products and services will cost more down the road.  We just don’t know how much more.  Over the past ten years, inflation has been very tame at less than 2% a year.  However, remember the double digit inflation of the late seventies, early eighties?  The cost of a gallon of milk in 1970 was $1.20. In 1982 it was $2.24.

The CPI – consumer price index, measures the change in prices of a basket of consumer goods and services commonly purchased.  It is used to make adjustments in the amount of Social Security benefits received as well as other pension distributions.  However, it doesn’t reflect all goods and services.

Does everything inflate up at the same rate?  No! Health care costs have gone up at a higher rate than normal inflation, as have advanced education.

For those of you planning your financial future, how do you invest wisely to overcome a 2% or a 6.25% inflation rate over time?  How do you maintain your purchasing power to afford the quality of life you want?  Here are five ideas:

Not Every Ski Slope Is Made Equal

Create financial savings buckets for different goals.  Create a lifestyle bucket which incorporates spending for your day to day expenses.  This will include mortgage or rent, food, clothing, and basic entertainment or other expenses.  You need to have a health care bucket, which are expenses above and beyond what your insurance, or Medicare will be paying for.  You want to have a bucket for long-term care needs.  Do you want to age in place, in the comfort of your own home?  What expenses will you incur with than choice?  Do you have advanced education for yourself or a family member in your future?  Large purchases or unexpected spending shocks need to be part of your planning process.

Don’t Rely on One Chair Lift

Create appropriate asset-allocation and diversification within those buckets based on your time frame, your goals, the appropriate amount of inflation you may encounter over time, and what market risk are you willing to take to overcome inflation risk.  Liquidity needs for the short term won’t need to overcome inflation and should be very conservatively positioned.  On the other hand a legacy bucket (assets that you want to pass on) may be positioned for long-term growth and more equity focused.

Seek Shelter from the Tax Storm

Take advantage of tax-sheltered vehicles when possible.  Taxes take a big bite out of your earnings.  If you can shelter potential growth over time and take distributions efficiently based on the types of tools you use, you will come out ahead.  Qualified retirement plans, ROTHs, IRA’s, annuities, life insurance cash value and 529 plans are all types of ways to shelter investment growth from current taxation.  Utilizing tax gain/loss harvesting is also a prudent technique.

Try Some Moguls Once in a While

Consider alternative investments that are created to overcome inflation.

  • Real Estate Investment Trusts (REITS).  Investment companies create groups of real estate that throw off dividends and have the potential to grow in value.  They are designed to provide income that helps keep pace with inflation, because rental increases are built into their leases.
  • Commodities that work independently of currencies. Oil, gold, silver, timber, wheat, land are all examples of commodities and provide good hedges against inflation.

Hire a Ski Instructor

  • Get professional advice. In order to make the most of the tools, techniques and temperaments to maximize your potential to overcome inflation, get good advice – sooner than later.  Obstacles come in many forms – implementing the proper protocol and making strategic changes as your life seasons and the economic seasons unfold will keep you headed in the right direction.

Whether it is a ski ticket, or a health costs, incorporate the appropriate inflation rate into your retirement optimization plan as you look at your longevity, lifestyle, liquidity and legacy needs.