In the realm of financial planning, discussions often revolve around market volatility, asset allocation and diversification. While these are undoubtedly critical aspects to consider, there’s one risk that often flies under the radar but can profoundly impact your financial well-being: inflation.

Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year -the silent erosion of purchasing power over time. As inflation increases, each dollar you own buys a smaller amount of goods and services. It’s a risk that all investors must address in their financial strategy. We believe inflation is the biggest risk most people face regarding their financial future and that of their families.

Inflation is more of a risk than market fluctuations

As a financial advisor, I often encounter clients who are primarily concerned about market risk — the ups and downs of their investment portfolios. While market risk is undoubtedly significant and requires careful attention, it’s essential to recognize that the biggest threat to your financial future may not come from the fluctuations of the stock market, but rather from the relentless march of inflation.

Historically, inflation has averaged around 3 percent per year in the United States. While this might not sound like much, over time, its impact can be substantial.

Consider that when I started working in 1986, the price of a postage stamp was 22 cents. Today a stamp costs 68 cents — more than three times as much. A gallon of milk was $1.08 in 1986, and today a gallon of milk costs $3.95 per gallon — almost four times as much.

The bottom line is that basic goods and services cost three to four times as much today as in 1986. If your money has not grown 300 to 400 percent, you are not keeping up with inflation.

Our primary role for clients is to maintain and enhance their lifestyle while simplifying their lives. To do this, assets must grow faster than, or at least equal to, the rate at which inflation and taxes erode them.

Invest your assets to grow over time

Given the corrosive nature of inflation on your purchasing power, it’s crucial to invest your assets in a way that allows them to grow over time. Simply leaving your money in a CD, savings account or under the mattress may provide safety from market downturns, but it won’t protect you against the effects of inflation.

Investing in assets that have historically outpaced inflation — such as stocks, real estate and certain commodities — can help preserve and grow your wealth over the long term. While these investments come with their own set of risks, they also offer the potential for higher returns that can help you stay ahead of inflation.

While investing in assets that have the potential to outpace inflation is essential, it’s equally important to diversify your investments to mitigate risk. Moreover, the allocation of your investments should be based on your specific needs, objectives and tax situation. For example, someone who is 70 years old and needs income today but is in a high tax bracket is in a very different position than another 70-year-old who doesn’t need income and is in a low tax bracket.

Also consider longevity risk

Another big challenge is that people are living longer and therefore spending money later in life. Called longevity risk, this challenge refers to the chance that life expectancies and actual survival rates exceed expectations or pricing assumptions, resulting in greater-than-anticipated cash-flow needs on the part of insurance companies or pension funds.

We’ve all heard of someone who has lived to be 90 or 100. People often have the mindset of the previous generation and use rules of thumb based on that time period. This can be a problem. To ensure you have enough money to last you through retirement, it’s best to overestimate how long you will live and how much money you will need.

In 1986, life expectancy in the United States was 74.8 years, according to the Centers for Disease Control. In 2024, average life expectancy in this country is 79.25 years, a 0.18 percent increase from 2023.

Yet today, people live into their eighties, nineties or longer. Our planning is based on this possibility. If someone allocates too many funds to expenses that don’t keep up with inflation, they may run out of money. Having your financial advisor design a customized financial plan based on your unique situation can help you manage inflation, longevity risk and other potential challenges.

Effective financial planning can combat the effects of inflation

Effective financial planning is the cornerstone of any strategy to combat the effects of inflation. A comprehensive financial plan should take into account your goals, risk tolerance and time horizon, and your advisor should review and adjust your plan regularly to reflect changes in your life circumstances and market conditions.

Our team will help you develop a personalized financial plan that addresses your unique needs and goals while accounting for the impact of inflation. By working with an advisor, you can gain access to professional expertise and guidance that can help you navigate the complexities of investing and make informed decisions that will protect and grow your wealth over time — regardless of the rate of inflation.

While market risk often dominates the conversation when it comes to financial planning, it’s essential not to overlook the insidious threat of inflation. By understanding the impact of inflation on your purchasing power and taking proactive steps to invest in assets that outpace inflation, you can protect yourself against the erosion of your wealth and build a more secure financial future for yourself and future generations.

Our team is here for you. Please feel free to reach out, without cost or obligation, to discuss your specific situation.

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Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Carver Financial Services, Inc., was established in 1990 with the vision of making people’s lives better — clients, team and community. With this mission, Carver Financial Services has grown to be one of the largest independent financial services offices in the country, managing $2.5 billion in assets for clients globally, as of  December  2023. You can reach Randy directly at randy.carver@raymondjames.com and in the office at (440) 974-0808. 

Any opinions are those of Randy Carver and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.