The Rent is Too Darn High

When it comes to planning for retirement, inflation may be beating your employees on both ends of the planning process.  As to the future, it may feel impossible to predict future costs with inflation rates that seem unpredictable. In the present, many workers’ budgets are feeling the heat of the rising cost of housing.  The cost of buying a home, often a first steady step towards building a retirement plan, now outpaces inflation. The cost of housing has pushed the typical homebuyer to age 44, a full 10 years older than in 1981.  Even employees who aren’t planning to buy a home will feel the impact of the rising cost of buying a house.  Competition in home buying adds pressure to housing of all kinds. Most importantly, the rising cost of housing is outstripping wage growth in most major cities.  In fact, in some cities, inflation in housing costs is twice the growth of wages.

How can plan sponsors and employers help their employees overcome this overwhelm and move towards building a safe retirement? If inflation feels like a storm, the key may be to find the eye of it.  As a weather event, a hurricane can feel like a sustained, uncontrollable chaotic force that drives towards you with no way to slow it down or dodge it. That is, with one important caveat – you can always move. This analogy may be helpful in getting around the same feelings about inflation; inflation may feel like slow moving, powerful and unavoidable chaotic force. But all storms have a center from which information can be gathered.

In terms of inflation, getting your employees into the eye of the storm to get information may be a tactic to getting them focused on retirement planning. First, defining the problem may help limit it. Inflation is a sustained increase in the general level of cost of goods and services in a specific location (county or city).  In essence, in an inflationary time, your dollar buys fewer goods. Understanding inflation as this limited of a concept, not an uncontrollable force may help take a little mystery out of the hurricane.

Second, if the biggest impact on employees is the rate of inflation on housing costs, then understanding that market may also help. The housing demand currently hitting the economy in 2018 is predicted to last for four to five years, not twenty to forty, the length of time your employees may have to build their retirement. The housing boom won’t last forever and neither will your employees’ concerns about it. But, given the importance of compounding interest, not investing for the duration of the housing boom will have a serious negative impact on employees’ retirement readiness.

Third, inflation doesn’t hit everyone in the economy in the same manner. Debtors do better during inflationary times because their debt is based on dollars. For example, if a student loan debt is locked in at a certain percent rate, and the debt is was accrued prior to the inflationary time, then the money on the debt may be worth less in inflation than before. So if $1 buys you less than 10 years go, it also stands to reason that $1 in debt is worth less (or hurts less) than 10 years ago. This assumes, however, that wages also increase during inflation, which for many workers has not happened. This may help employees understand how their housing costs may impact their budgets over time and help encourage them to invest.

Fourth, inflation doesn’t hit every city in the same manner. Its no big surprise that three of the six top cities with the highest increases in the cost of living are in the pacific northwest, including Portland and Eugene, Oregon and Seattle, Washington. Other inflating cities include Denver, Nashville and Atlanta. Often, positive side effects follow with cost of living jumps, like increased employment. This last piece of information may be vital to employees – if they are seeking to retire, then they may be able to relocate to city that will not have the same kind of inflating cost of living changes that the employees currently are experiencing. In other words, retirement hubs don’t tend to experience inflation in the same manner as growing cities full of youngsters.

Fifth, it may be possible to calculate inflation in the shorter term (years, not decades). Some economists can calculate inflation rates so that investors can determine how much of a return (in percentage terms) their investments need to make for them to maintain the standard of living the employee has decided they want to pursue in retirement. This also means that formulas could be created to choose stocks based on inflation rates. This may also mean that portfolios could be balanced or rebalanced to maintain an inflation-specific rate of return. If that sounds a little like the math club meeting to your employees, the take home point to get across to them may be that there is a method to help address known inflation increases. Having employees understand that they can assess, with the help of financial advisors, the investment products they have and the mix that they currently are comfortable with as often as they’d like may help employees see that inflation is not as chaotic as it may seem. Of course, employees will need to understand that constant changes in their portfolios in trading will affect their returns in terms of transaction costs and growth, but the key may be to arm the employees with knowledge.