Time is Your Friend, Timing is Not:
A Personal Approach to Inflation, Investment Planning, and Retirement Durability
Time is Your Friend, Timing is Not: A Personal Approach to Inflation, Investment Planning, and Retirement Durability
Have you ever been so focused and immersed in what you’re learning, experimenting with, and observing that time flies by? Then, when you finally look up, you’re ready to share your findings?
Well, that is today’s post. Over the past month, as part of my annual investment review, I’ve spent a lot of quiet time studying the long-term impacts of time on investments—particularly inflation's effect on safe withdrawal rates and the durability of retirement investments. I’ve been diving deep into the numbers, both from a broader economic perspective and my personal financial analysis. What I’ve uncovered has confirmed some of my thoughts and opened my eyes to new insights. For anyone thinking about retirement planning—especially those considering early retirement with long horizons—this article is for you.
Let’s start with thinking like an investor.
Investor Mindset Basics
Converting Time-Earned Dollars into Investment Dollars Earning For You
When you invest, you’re making strategic decisions to convert your earnings into investments that put other people and managers to work for you. Here’s how:
Dividends: These come from companies with a management team and employees who are distributing part of their profits back to shareholders like you.
Interest: This comes from bonds or other debt instruments where you’re lending money to governments run by elected officials and employees or corporations managed by a CEO and their executive team.
Preferred Returns and Profits: While smaller privately held companies also hold potential, they require a rock-solid management team and infrastructure. These companies pay out preferred returns or cash distributions to investors like you.
Rents: Real estate properties you own generate passive income through a business which is managed by corporate leadership or a general partner and pays you in the form of rental payments.
Capital Appreciation: When the value of your investment increases, that growth can later be sold for profit. When these businesses are sustainable and well-managed, the management and the employees create durably value that other investors recognize in the form of capital appreciation. That’s money you can eventually convert back into cash, if and when you sell.
As you can see, you are truly hiring management and employees to run the businesses you are invested in, which will generate income for your investments and ultimately for you and your family.
What is Retirement? It’s Exchanging One Form of Earning for Another.
The goal of retirement isn’t to stop working completely. It’s about gaining the freedom to do the work you want to do. The investments you’ve made allow your dollars to earn more dollars for you. This means:
Flexibility to Pursue Your Passions: Whether it’s paid or unpaid work or projects, you have the freedom to choose.
Financial Freedom: You’re no longer exchanging your time directly for money because your investments are generating income for you.
Financial Strength: The ability to take on riskier projects, speak your mind without fear of losing your job if you speak up on important issues.
So, we are all pursuing retirement where we are no longer exchanging time for dollars for someone else's benefit. Instead, we are using our dollars to invest in other employees and managers to help create financial strength and flexibility for ourselves and our families. The timing of when we feel free to pursue our own innovations and investments (professional or family) is driven every day by the financial decisions we make with time. Let’s dive deeper!
TIME
Time in the Market and Investments: The Earlier You Start, the Easier the Lift
Starting early makes investing easier. The power of compounding is on your side, so you don’t have to save as much later. But if you’re getting started later, say in your 40s or 50s, it’s not a lost cause. Here’s why:
Peak Earning Years: Your 40s and 50s are typically your highest-earning years.
More Discretionary Income: While you may have missed out on time if you started later, you’re likely earning more, so it won’t hurt as much to invest a larger amount.
Live Below Your Means: By keeping your lifestyle modest as your income rises, you create a larger gap for investing, which helps you catch up on your investment goals.
Why This Matters Now: Inflation is the Silent Threat to Retirement Durability and the Timing of Your Financial Freedom
Inflation’s Compounding Effect Over Time
The longer your retirement horizon, the more sensitive your plan is to even small changes in inflation. And trust me, over time, inflation adds up significantly.
Inflation may seem like a far-off concern, but it’s one of the most dangerous silent threats to retirement plans. Even the smallest change in inflation rates—say, 0.1%—can have devastating effects over a very long-time horizon. Think about it like this: If a pilot’s flight plan is off by just one degree, they could miss their destination by hundreds or even thousands of miles depending on the flight duration. That’s exactly what happens when inflation creeps up over time. The longer your retirement horizon—30, 40, 50, even 60 years—the more sensitive your plan becomes to slight shifts in inflation.
To summarize:
Longer Horizons Are More Sensitive: The longer your retirement horizon (30, 40, 50, 60 years), the more inflation compounds and erodes your purchasing power.
Personal Inflation vs. Reported Inflation: Don’t just rely on official inflation numbers. Analyze your real costs on large portions of your personal budget—utility bills, healthcare, insurance premiums, and property taxes—and calculate your own inflation rate. It’s likely much higher than 2.5%.
For those of us planning for early retirement, this is an even greater risk. You have to account for inflation over decades. Even small miscalculations could completely alter your financial trajectory, leaving you far off from where you expected to be—and in the worst cases, causing a plan to no longer be viable.
The Work Behind the Numbers: Real-Life Inflationary Examples
In my own research, I’ve dug into real-world examples that demonstrate the real impact of inflation, and frankly, the numbers may be subtly surprising to some.
Insurance Costs: Over the past few years, I’ve seen insurance costs for church organizations and individuals increase by 40% year over year. That’s inflation way above what we typically hear in economic reports. Some of this is due to underwriting reconciliations, but much is driven by climate events and other social factors. Vehicle insurance rates also continue to rise as older cars are retired and high-tech, more expensive-to-repair vehicles become the norm.
Utility Bills: In my personal analysis, I’ve tracked utility costs over the past 10 years and found a 76% increase. This is a significant jump, particularly in fixed-rate contract terms. Even in cases where you’re locked into a contract for a few years and think you are limiting inflationary costs, it’s important to track your data to see the real cost of contract-based services. With higher demands for energy, until we have a broad set of energy solutions, expect this kind of pricing to continue.
These aren’t just isolated examples. They’re part of a larger trend where key living costs—insurance, utilities, healthcare, higher education, and even property taxes—are outpacing official inflation numbers. If you’re not proactively tracking your own inflation rates and combating them with action where you can, you could be setting yourself up for a financial shortfall in the future, especially if your financial retirement model is using the wrong inflation rates.
Timing: Why It’s Not Your Friend
There are all sorts of timing challenges: Timing Returns, Timing Withdrawals, Timing The Markets, Compounding Fees, Timing Tax Planning, and Inertia. Let’s break down all the ways these types of timing are not your friend—or even a frenemy. Some can be downright brutal.
Sequence of Returns Risk: Timing Withdrawals
One of the biggest threats to your retirement plan is sequence of returns risk. This happens when market downturns occur early in your retirement, and you’re forced to withdraw funds during a low point. Here’s why it’s so dangerous:
Withdrawals During Downturns: Once you pull money out during a downturn, you’ve locked in those losses permanently.
Permanent Damage: In 2022, first-time retirees saw firsthand how a significant market correction left some people unable to recover from early withdrawals.
Understanding this risk is critical because withdrawing funds too early during a downturn could create irreversible damage to your retirement plan. The key is to recognize whether a market dip is temporary or part of a long-term correction and act accordingly. At a minimum, have access to cash before you retire so you can avoid liquidating investments at a bad time. And expect to manage spend for several years thereafter if you did have to withdraw investments. This will allow for your remaining investments to return back to pre-retirement levels before you start to go back to your original plan. Some may say, this risk is real for the first 10 to 15 years of your plan.
Traditional Timing: Timing the Market Rarely Works
Let’s face it—trying to time the market rarely works. Most studies show individuals make less than the market in a given year as they tend to be manage by emotions, selling low and buying high.
Even if you manage to sell high and buy low, you still need to get the timing right when re-entering the market. Here’s why timing the market usually fails:
Hard to Predict: You may sell at a good time, but knowing when to buy back and having the stomach to buy during market downturns is a real challenge.
Small Impact: Even if you time it perfectly, did you invest enough to make a real difference? Probably not.
A recent example is the August 5th, 2024 market correction due to the yen carry trade unwind. Some folks managed to purchase on that fateful day, but if you didn’t invest a meaningful amount, the new found gains didn’t amount to much. Timing the market sounds great in theory, but in practice, it rarely pans out in meaningful ways.
Check it out for yourself. Take a look at any trades you made this year. What prompted your decision to buy or sell? How has the transaction fared thus far? In a bumpy year like 2024, you probably have more transactions than you might imagine.
Compounding Fees: They Can Erode Your Gains
Fees are often an overlooked factor that can severely erode your long-term returns. Here’s why they matter:
Financial Advisor Fees: A 2% fee can seem small, but over decades, it can eat away at a significant portion of your gains —especially on small account balances.
Fund Fees: Review your fund fees carefully. Even seemingly small percentages can add up and drag down your overall portfolio performance.
Other Hidden Fees: From account maintenance to transaction fees, these small charges can add up over time.
There is a value in having a financial advisor. A really good one should help with investment allocation, risk mitigation, retirement planning, tax strategies, and estate planning support. If they are doing all of these strategies, then a higher fee makes sense. If they’re just handling investment management, you should negotiate those high fees down.
Bottom line: If you don’t regularly review the fees you’re paying, you could be undercutting the value of your investments. These fees compound, working against you just like inflation.
Timing for Taxes: Strategic Steps Not to Miss
Maximize Contributions to Tax-Beneficial Accounts
This includes your Health Savings Account (HSA), Roth IRAs, and Roth 401(k)s. These are time-bound actions that have to be taken within set deadlines. If you miss them, there are no makeup windows. For today’s discussion, let’s just focus on Health Savings Accounts (HSAs).
If you have a high-deductible health plan, you consider contributing to your HSA, whether you are working or retired (prior to Medicare). Here’s why HSAs are such a powerful tool:
Reduces Federal Taxable Income: Contributions lower your taxable income.
No Employment Taxes: No social security or medicare employment taxes are withheld, which is a unique retirement account feature.
Tax-Free Growth: Funds in your HSA grow tax-free if used for qualified medical expenses.
Long-Term Flexibility: You can save receipts and reimburse yourself years later, letting the funds grow tax-free in the meantime. HSAs can also be used for Medicare premiums or, after 65, as a regular retirement vehicle (though non-medical use will be taxed).
HSAs offer a triple benefit, making them one of the most efficient tools for retirement and healthcare planning.
Manage Your Deductions and Tax Brackets
With the Tax Cut and Jobs Act (TCJA) potentially expiring at the end of 2025, managing your income and deductions is more important than ever. Here’s how:
Track Your Income: Ensure you’re optimizing your income to actively decide if you wish to jump into higher tax brackets in 2024 and 2024. Post-TCJA, additional brackets would return, and rates in the same brackets will increase at certain levels.
Optimize Deductions: Review your deductions each year to maximize savings, and plan for potential tax changes such as the reversion of State and Local Taxes (SALT) deductions, lower standard deductions, lower charitable contribution maximums, etc. All of these will go back to pre-TCJA levels.
If you’re planning on retiring in the next few years, now is the time to start planning your income for tax purposes. Items that can impact your effective tax rate include the TCJA sunset, Social Security Income, Medicare Income-Related Monthly Adjustment Amount (IRMAA), Required Minimum Distributions, and more. You’ll want to seek a CPA or tax professional to help manage your tax exposure and see if you can obtain any tax alpha.
Timing of Returns: Mean Reversion of Returns
Expect future returns to change as well. We’ve had exceptional returns in recent years, but it’s very possible we’ve pulled forward too much of the future’s expected earnings and therefore gains. That could mean lower returns going forward, and your long-term plan could be impacted if investment returns don’t meet your plan expectations. Bonds, which many people rely on for stability, may not turn out to be the friend they once were, especially as we grapple with government debt and potential future tax hikes to help close the tax gap.
Timing: Lack of Action and Inertia
Lastly, inertia is a real enemy. Many people delay taking action, whether out of fear or complacency, thinking they have plenty of time. But inaction can create more risk than doing something. Time can be your friend—if you use it wisely. Don’t let fear keep you from moving forward. Plan for both the seen and unseen, for the quiet and loud. And keep in mind, for those of you with very long retirement horizons, we should be mindful that inflation is real and can be impactful to our plans. Hmm!
Leverage: A Best Friend to Time and A Fighter to Timing
Leverage can be a key tool to combat inflation and help build wealth over time. Leverage comes in many forms: labor, capital, and technology. Here’s why leverage can make a difference to your financial future:
Leverage in Business: You want others working for you, whether that’s employees in your own business or managers in companies you invest in. This will help you scale your business, and in the case of public markets, you are investing in world-class leaders and teams to deliver great results. If they don’t, they will be replaced over time. Public markets do not suffer fools for too long.
Leverage in Real Estate: Use loans to build a real estate portfolio that generates rental income and grows in value over time. Here, you are using someone else’s capital to get into capital-intensive businesses with large economies of scale through real estate loans.
Leverage in Technology: Invest in technology that helps you get things done more efficiently, or in some cases, eliminates the need to do them at all. Technology can also be in the form of new software, processes, and procedures, which can be sold to others. Also, there is now the ability to create proprietary data used in AI language models, which can produce results or be sold to others.
Leverage allows you to multiply your efforts and earnings without having to do all the work yourself. Here we enter the sphere of velocity and rate of change—both crucial in fighting inflation. By investing in companies with strong growth prospects, solid management, and scalable operations, you are leveraging and positioning yourself to ride out inflationary pressures.
Action Steps You Can Take Now
Do Your Own Inflation Analysis: Look at your largest costs—utilities, insurance, higher education, property taxes—and calculate the real inflation you’re experiencing over the last 10 years. It’s likely higher than the 2% you hear about.
Talk to Your Financial Advisor: Find out what inflation rate is used in your financial planning models. They may have different rates for healthcare or higher education, but if you don’t agree with a 2% inflation rate (on other costs) when you’re seeing something higher, discuss how this can be adjusted and figure out if you need to save more.
Review Your Asset Allocation: If you believe bond and money market returns will be low—or, in the case of bonds, maybe negative long term—you may need to consider other asset classes that historically provide higher returns to combat inflation. For example, in my health savings account (HSA), which I plan to use for future healthcare cost reimbursements, I have a NASDAQ-like fund. It’s more volatile but has a higher historical rate of return, helping to combat inflationary costs.
Evaluate Your Fees: If you’re paying a financial advisor based on a percentage of your portfolio, take a close look at what services are included. A 2% fee can be crippling over time especially if it is just for investment management. Also, review the fees in your mutual funds and ETFs, and identify any other costs that may be eroding your returns.
Maximize Contributions to Your HSA: Contributing to an HSA offers significant tax benefits and long-term flexibility. Make sure you’re fully funding this account if you have a high-deductible health plan. Healthcare costs are high inflationary costs you will need to combat.
Manage Your Taxes Efficiently: Keep an eye on your income, deductions, and tax brackets, especially over the next two years with potential tax law changes. Take action with your expert CPA or tax professional.
Leverage Time and Resources: Take advantage of leverage. Whether through others working for you, real estate loans, or investments in companies managed by skilled professionals, leverage allows you to multiply your efforts and earnings. The key to combating inflation is creating leverage in your investments to grow faster than inflation which erodes your purchasing power.
Take Action & Overcome Inertia: Use this action list to start moving from thinking to doing. Inaction, whether due to fear or complacency, creates more risk than taking an imperfect step. Time is your ally if you act wisely and timely. Plan for both the seen and unseen, the quiet and loud through your daily and weekly action steps to get you to a place of greater flexibility and freedom.
Final Thoughts: Inflation, Leverage, and Time
Inflation is real, and it’s a silent threat to long-term financial planning. My own research into insurance, utility costs, property taxes, and other expenses shows that real inflation is much higher than what’s often reported. The good news? By taking action now—leveraging time, resources, and your investments—you can protect yourself from inflation and ensure that your retirement plans remain durable over the long haul.
I’m paying attention to technological innovations. We may find deflationary impacts with the advancements of artificial intelligence, but other impacts may arise, so the end result remains uncertain. It’s an exciting time but also a time of greater velocity.
If you have not been paying attention to your friend called TIME, take a moment, and let them know you see them and your understand their importance. They are here to help you!
Until next time, let's create a good financial plan taking a thoughtful look at inflation so we can embrace any future that comes your way.
Disclaimer:
This newsletter and podcast are not financial advice. Rather, this is educational information as you build your financial skills to be a better sovereign of your own finances.
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Note: Thanks to AI for helping scribe and edit my dictation on this subject, which is based on my research, observations, experience, and perspectives.
Deep Dive Materials: Extra Readings/Studies
Shadow Inflation Rates - Site last updated in 2023.