Without a descriptive cultural identifier like the preceding “baby boomers” era, which followed the great depression, “GEN X” has lived through a great recession and, currently, pandemic-related inflation. If you fall into this generational cohort, you’ve been affected by inflation in unique ways.

It’s no secret that inflation has soared in the last several months. The Consumer Price Index (CPI), a commonly used measure of the price of consumer goods and services, has risen nearly seven percent over the year. That’s the highest rate since 1981 and much higher than the 1.5% average annual inflation rate of the previous decade.

Before we dig into personal finances and inflation effects, it might help to identify the members of the generation (alphabet soup), so you can determine which one you are categorized in (if you don’t already) based on the 2021 census. 

• Boomers: born between 1946 and 1966 – currently between 56-76 years old (71.6 million in the U.S.)
• Gen X: born between 1967 and 1982 – currently between 40-55 years old (65.2 million people in the U.S.) 
• Gen Y / Millennials: born between 1983 and 1998 – currently between 24-39 years old (72.1 million in the U.S.)
• Gen Z: born between 1999 and 2012 – currently between 10-23 years old (nearly 68 million in the U.S.)
• Gen A: starts with children born in 2013 and will continue at least through 2025, maybe later (approximately 48 million people in the U.S.)

Get Your Generational X Financial Planning Analysis! 

You can read more about what makes each generation different. See if you can relate to Gen Xers’ top five New Year Financial Resolutions. When working with our financial advisor Greeneville, TN team, your unique earning, spending, and investing habits will be assessed, not assumed.

Headlines about inflation are everywhere. Whether you’re purchasing oranges at the grocery store, buying a new or used car, or filling up for gas – you are feeling the impact. Whether you work from home or drive to and from, you probably notice the higher prices of what feels like everything. Like you, folks in Generation X need to understand how it affects finances in general.

Inflation Erodes the Value of Money

Inflation diminishes the value of your money. The current seven percent inflation rate means that you need $1.07 to purchase the same thing $1.00 bought last year. (Plus, note that the CPI is an average; the price of many goods and services is going up faster than the average.)

Let’s start with the money you earn. Plan accordingly based on the current market since you might still be in the workforce or are currently retirement planning. Because you can purchase less for the same amount as last year, the value of your money has eroded.

If you receive raises or have changed jobs that kept pace with inflation, you’re lucky. But with inflation at seven percent, few people have kept pace.

Inflation can affect your overall cash flow and budget. You may want to make adjustments in purchases to augment the purchasing power of your money.

Inflation Will Diminish the Value of Your Investments Over Time

Let’s now look at your investments. Inflation erodes the value of your assets over time. That’s particularly important for retirees or pre-retirees who expect to retire on a fixed amount of money. 

If you expect to get $5,000 per month from your retirement funds in your golden years, you also need to factor in what $5,000 will buy in those years versus what it buys now. 

This is always true of inflation, by the way. It’s prudent to work with a financial advisor in Greeneville, Tennessee, so that you’re sure your retirement funds will provide a comfortable retirement while factoring in inflation. This is true when inflation is raging and when it’s at a more manageable two percent. 

This can be particularly difficult for Generation X because they have only recently started to amass household wealth like Boomers did before them. In fact, during the Covid pandemic, Gen X’ers’ net worth climbed 50 percent, two-thirds more than the net worth of Boomers over the same period. 

For many years, Gen X was viewed as the generation in which the American dream of future generations doing better than the parents had stopped and perhaps even reversed. However, more recent data (pre-Covid) indicated that, on average, Gen X earned more than their parents but translated those earnings less into household wealth. 

The Covid era, at last, reversed this picture since increases in net worth were in part driven by advances in the stock market and upswings in housing prices during the period. 

But Gen X needs to ensure that inflation doesn’t overeat into the investment wealth they’ve amassed. This is how comprehensive financial planning helps to change lives. Relying on social security alone is more than likely not your preferred way to retire. Your financial goals should be considered more now than ever. 

Inflation Versus Investment Returns

It’s essential to understand how inflation affects the assets in your portfolio. Usually, retirement and general investment portfolios are divided between cash instruments (such as savings accounts and certificates of deposit or CDs), bonds, and stocks.

While it’s essential to have cash savings in an emergency, cash does not keep pace with inflation currently. Interest rates are, in fact, at historically low rates. Even if the U.S. Federal Reserve raises them this year, which is widely forecast, the value of money in cash accounts will erode.

Bonds may also diminish in value because the yield on bonds like U.S. Treasuries is also at historically low levels. Also, the price of bonds trades inversely to interest rates; when interest rates rise, the prices go down.

Stocks are historically one of the few asset classes that outpace inflation. For the last century, stocks have risen at an average annual rate of twelve percent, even when overall yearly declines in the broad market averages are factored in.

But stocks are also riskier than either cash or bonds because stocks fluctuate. If you plan to retire in a year when the stock market drops (as it does periodically), you may have to push your retirement out.

Stock market risk is usually managed in portfolios in several ways. First, many portfolios divide assets between cash, bonds, and stocks so that the stability of money and the relative strength of bonds counterbalance the volatility inherent in stocks. 

Second, asset allocations should be reviewed at least every year. 

Then, it’s prudent to review how much you’re saving for retirement as well. Because inflation cuts into the value of money, a high inflation period can be a time to review your retirement fund contributions. 

If you participate in a 401(k), you can contribute as much as $20,500 in 2022, a $1,000 boost from last year. In addition, if you are 50 or over, you can contribute an additional $6,500 every year. Especially if your company matches your 401(k) contributions, you’re leaving money on the table if you don’t contribute.

Traditional 401(k) contributions are deducted from your paycheck pretax, which can save you on taxes. 

If your company doesn’t offer a 401(k), Individual Retirement Accounts (IRAs) are also excellent retirement savings vehicles. Contributions to traditional IRAs can be deducted from your taxes.

Investments in both 401(k)s and IRAs grow tax-free until you withdraw them at retirement.

Concerned about inflation as a Gen X’er? Contact our financial services team in Greeneville, TN, to discuss inflation and any other aspect of your financial life. Action now will support long-term rewards.

Make Smart Moves in 2022 as You Navigate Inflation with a CERTIFIED FINANCIAL PLANNER ™ – CFP® 

Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them and their heirs.