Are you factoring inflation into your retirement plan?

September 1, 2009

During our working years, we justify the negative impact of inflation by relying on the expectation that our incomes will rise at levels consistent with or above inflation. Unfortunately, many of today's physicians are experiencing just the opposite.

Key Points

Q I'm planning on retiring next year but am very concerned that inflation may increase, given all of the government’s spending. Do you have any thoughts?

Planning is now more important than ever, and planning for retirement income must take inflation into account. Failing to do so will be an expensive mistake, as you will certainly experience a continually decreasing standard of living during retirement.

Many investors are concerned that the federal government's stimulus package, which was designed to supercharge the economy's engine, could in turn create a rising inflationary environment. Inflation can have adverse effects on the economy, since uncertainty about future inflation may discourage investment and saving.

The Federal Reserve has some tools to control inflation, such as the ability to adjust interest rates, if the Fed feels it's necessary based on its other economic goals. But if inflation climbs too steeply, it may also lead to higher interest rates. This, in turn, negatively impacts mortgage and credit card payments. For corporate America, rising prices can make it difficult to plan future spending. This could result in reduced economic activity, as opposed to the original goal of stimulating the economy.

Deflation, on the other hand, occurs when the annual inflation rate falls below 0%, resulting in an increase in the real value of money due to a negative inflation rate. Deflation most often occurs when there is a strong supply of goods, but weak demand. In a deflationary period, banks may reduce or even completely stop lending, which leads to lower personal and corporate spending.

For businesses, a lack of borrowing opportunities could curtail their ability to expand. For their employees, lower wages and less take-home pay or job loss will certainly impact their spending and savings habits.

The Fed can implement fiscal and monetary policies, including interest rate adjustments, in an effort to help contain or avoid a deflationary environment. The concern, however, is that if actions are too delayed or are not effective, deferred spending patterns could cause the economy to slow significantly or even come to a complete standstill. In a deflationary environment, businesses look for innovative ways to boost productivity, since price adjustments are typically not an option.

Regardless of which direction the economy takes, it is important to reassess your current investment portfolio strategy and retirement objectives to ensure that you are well prepared for either economic situation.

Q One of my partners is being audited by the IRS, and I am concerned that I, too, may be audited. How long should tax records be kept?

A Keeping accurate and detailed records in an organized manner is the best way to protect yourself in the event of an IRS audit. Unfortunately, there really is no definitive answer as to how long you have to hold onto your records.

At the very least, you should keep your records until the statue of limitations for the return expires. Normally, this is 3 years after the due date, including extensions, or 2 years after the tax is paid, whichever is later. But the limit is 6 years if your gross income is understated by more than 25% of the amount shown on your return. In addition, there is no time limit at all if an income tax return is found to be false or fraudulent. Be sure to contact your accountant to determine whether there are other ways to protect yourself.

Joel M. Blau, CFP, Ronald J. Paprocki, JD, CFP, CHBCJoel M. Blau, CFP, is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or blau@mediqus.com
or paprocki@mediqus.com
.