Inflation and market downturns must be considered when creating retirement plans as they are important considerations that can have a significant impact on a client's ability to achieve their retirement goals. Inflation erodes the purchasing power of money over time and market downturns can reduce the value of investments.
Here are some examples of how inflation and market downturns have impacted retirement plans in recent history:
Inflation: In the 1970s, the U.S. experienced a period of high inflation, with the Consumer Price Index (CPI) reaching double-digit levels. This greatly impacted retirement plans as it reduced the purchasing power of savings and investments. A FEE-ONLY financial adviser may have recommended strategies such as investing in assets that can keep pace with inflation, such as stocks and real estate, in order to maintain the purchasing power of the retirement savings.
Market downturns: The 2008 financial crisis saw the stock market drop by more than 50% and many investors lost a significant portion of their retirement savings. A FEE-ONLY financial adviser may have recommended diversifying the investment portfolio to reduce the risk of a significant loss during market downturns and having a plan in place to take advantage of opportunities that arise during a market downturn. Holding tight turned out to be a pretty good strategy for those that had to weather through this storm.
Low-interest rate environment: A low-interest rate environment, such as the one that started after the 2008 crisis and ended until recently, made it difficult for retirees to generate sufficient income from fixed-income investments to cover their expenses. A FEE-ONLY financial adviser would have recommended investing in more aggressive investment strategies, such as stocks, to generate higher returns and maintaining a sufficient cash reserve to cover unexpected expenses.
Market timing is difficult, and each retirement plan must be different. A FEE-ONLY financial advisers can take into account inflation and market downturns when creating retirement plans as they understand the importance of these factors in achieving a client's retirement goals. They will recommend strategies that aim to preserve the purchasing power of savings and protect against market downturns to help ensure that a client's retirement plan is on track to meet their goals.
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