The consumer price index’s 7.5% year-over-year increase between January 2021 and January 2022 marked its highest spike since 1982, and the news has some physicians who are planning for retirement questioning whether inflation will tarnish their golden years.
While doctors typically have high monthly retirement incomes replete with discretionary spending—and they can also combat inflation via certain investment tactics—it is unknown whether buying-power-reducing inflationary trends are transitory or will continue. The good news is that, at least for now, the US economy is on the upswing.
Putting inflation into context
Current US inflation is partly a product of multiple factors, including:
Pandemic-driven supply chain woes that make products scarce
Labor shortages that force companies to pay workers higher wages
High energy prices that drive across-the-board cost increases
Low interest rates that make borrowing money easy
Depending on whom one asks, an increased money supply that arguably dilutes the dollar’s value
Despite these concerns, the fourth quarter of 2021 saw an annual gross domestic product rate increase of 6.9%, according to US Bureau of Economic Analysis data. And overall, many companies are struggling to keep pace with white-hot demand for their products and services.
Should physicians worry about inflation?
Although macroeconomic trends are one consideration, assessing inflation’s overall impact on physicians who are planning for retirement is another. W. Ben Utley, CFP, a primary advisor at Physician Family Financial Advisors, said he isn’t particularly worried about how inflation may affect retirement for physicians.
“Of all the concerns there are in retirement, inflation is one of those concerns, but I'm not any more concerned about inflation now than I have been in the last 25 years,” he said.
James M. Dahle, MD, FACEP, FAAEM, founder of The White Coat Investor, expressed a somewhat similar sentiment.
“Everyone should be concerned about inflation, but that is not a new thing,” Dahle said. “Inflation has always been a concern and every investor should position their portfolio to combat it. The only return that matters is your after-fee, after-tax, after-inflation return, and these days, inflation is the biggest opponent the investor faces.”
Strategies for physicians
While long-term inflationary trends are unclear, physicians can hedge against it, in part by purchasing stocks, because corporations offering stocks increase their products’ prices in tandem with the higher costs associated with inflation, ultimately meaning healthy returns for their shareholders.
Some may still see trouble for investors, citing a hypothetical future scenario in which the US economy is weak and corporations are unable to increase their prices, and profits decline.
“I think that's largely scare tactics,” Utley said. “We had stagflation in the 1970s, but we're not seeing stagflation now. We have a vibrant economy.”
Bonds may also present investment opportunities, Utley added.
“In the long run, as inflation rises, yields on bonds rise, which, in the short term, erodes the price of those bonds, but in the long run, [again], it increases the yield; higher income tends to be better for retirees,” Utley said.
Dahle emphasized asset diversification in the face of inflation.
“The key is to include a sufficient quantity of assets that tend to do OK in an inflationary environment,” Dahle said. “The majority of a portfolio should be invested in stocks, real estate, and inflation-indexed bonds such as TIPS and Series I Savings Bonds. While I am not a big fan of carrying debt into retirement, long-term, non-callable, low fixed interest rate debt is actually an excellent inflation hedge.”
Physicians can separately lower their costs by adjusting discretionary spending for travel and luxury items, such as expensive cars.
“The physician could purchase an $80,000 new luxury vehicle, or they could buy themselves a $20,000 used Japanese import,” Utley said. “And, so, if I have the choice of paying $1 for good or paying $4, then you could say that in some ways I've got room for inflation to quadruple. So, how impacted am I, truly, by inflation?”
Utley estimates that the average physician’s monthly budget is between $10,000-$15,000. That’s much higher than many Americans’ budgets, and allows for a cushion.
“I would be more concerned if I were [someone] retiring on fixed income, living on Social Security. … The amount of stuff you can buy on Social Security kind of puts you in a position where you're living on basic goods.”
According to Dahle, it’s the rate of inflation that you can control that truly matters.
“The most important inflation rate is your own personal rate of inflation,” Dahle said. “For example, historically healthcare and education have outpaced overall inflation, but if you're not buying those things, your inflation rate may be lower than average.”
Dahle, James M. MD, FACEP, FAAEM, founder. The White Coat Investor
U.S. Bureau of Economic Analysis. Gross Domestic Product, 4th Quarter and Year 2021 (Advance Estimate). 2022.
US Department of Labor - Bureau of Labor Statistics. Consumer Price Index - January 2022. 2022.
Ultey, W. Ben. CFP, primary advisor. Physician Family Financial Advisors