The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Comments by the Fed – FMOC: Suggest the Fed is trying to gently convince their adoring public that inflation may actually turn out to be “a little stronger than they forecast for a little longer than they forecast.”

Grant Williams’ notes in Things That Make You Go Hmmm:

We may be facing demand-driven inflation as a consequence of misguided monetary policy and misdirected fiscal stimulus. Monetary stimulus had some effect, of course, and the latest growth forecasts suggest, it is already dissipating. The Fed has done so much, so fast, it produced a self-limiting recovery in which supply – chain inflation (caused by all the container ships anchored / waiting in Los Angeles / Long Beach) tend to cap potential growth. The trucking industry may also be a part of the log-jam, backing up deliveries.

5.9% Announcement by Social Security

That is the increase that retirees receiving Social Security will pick up next year to account for inflation. It is the biggest jump in 39 years and captures what consumers have been feeling acutely over the past year: Stuff is getting more expensive.

The fact that Social Security payouts will reflect higher costs is certainly a plus for that portion of retirees’ income streams. Inflation may prove fleeting, a short-term blip resulting from pent-up pandemic demand and snarled supply chains, or it could persist. Or, it could be that the medical premium portion of Social Security could be increased and consume much of the 5.9% announced increase. No one has said much yet, other than the increase of 5.9%.

Dentist’s and Retirees Take Note

I believe all dentists and retirees can learn to think about inflation more individually and holistically. We can start with taking stock of our own rate of inflation, which is not a standard CPI. We can look at the details of our Personal Spending Plans (Budgets); a function of what we spend our money on and how much inflation we are seeing in those outlays. Inflation considerations also extend to our portfolio; think about our withdrawal or “burn” rate, if retired, as well as what kind of inflation protection to embed in our portfolio’s. (more on this below)

We can also look at, and think about inflation today, examine our own personal inflation rate, and safeguard against inflation’s corrosive effect on our investments and our Economic Engine. For most dentist’s, our Economic Engine is our dental practice. We can study our line items on our Profit and Loss Statements and/or our Management Income Statements (MIS), year-over-year or twelve month roll, looking for inflation creep in line items like; consumable dental supplies, laboratory costs, salary and benefits (hygiene, clinical, and administrative teams), occupancy total costs, administrative supplies and services, notice the rise in dental equipment cost (replacement costs), along with financing costs. All of the above will combine into our Personal CPI, which may well require an adjustment in our dental fees.

Calculating Our Own

As we collect our personal and practice inflation data, be willing to ask a question; what are we discovering? If looking at the FOMC CPI weightings and they look nothing like our own, when considering our increased household and practice spending, we are most likely on the right track. Our outlays for housing may diverge significantly from the CPI percentages, especially if we live in a paid-off home. We will still have costs for upkeep, insurance, and property taxes, which are also included in Housing Costs.

By doing the above exercises, we can learn to tweak inflation expectations, pro-actively while attempting to keep then in-line for each of line items, and incorporating our own experiences and discoveries. At the same time, it is important to not come away with a false sense of precision with respect to inflation. For one thing, inflation statistics can vary by section of our country, state, and even town by town. Moreover, a number that can bear paying attention, is the trend in our actual, all-in spending, which depends on a few key variables: our fixed and discretionary expenses, as well as, what is going on with inflation in each of the spending categories. Ultimately, our aggregate household and practice spending trend matters more because we exert a level of control over some of our spending, where the overall inflation rate is out of our hands.

Early Retirement

Is early retirement is on your radar? Data suggests that the case for a growing share of workers, inflation protection is an even bigger hurdle. That is because we will be using our retirement dollars, and spending them over a longer time horizon, when starting early. This increases the odds that inflation could flare up sometime during our drawdown period: pay attention to withdrawal rates, portfolio construction, and Social Security adjustments.

Investment returns over the next decade might not be so great, some experts warn. Be prepared to rein in our spending in case a lousy market materializes. A threat of experiencing big portfolio losses early on in retirement, when our portfolio value is at its highest, is one of the key threats to the durability of any retirement plan. And sequencing risk looms particularly large in environments like the current one, when bond yields are low and equity valuations are on the high side. If market returns are indeed lower than our two decade averages, in the first few years of retirement, our best defense is to cut our spending. For younger dentists reading this a lesson to be learned is “keep shoveling it in” and increase the percentage of present income earmarked for saving and investment; over time, through compounding, this will ease your worries and provide a greater measure of choice in financial decision making.

What we may want to discussed, in this context, is the other side of the same coin. Yes, today’s retirees can become more conservative on the withdrawal rate, and use a safer withdrawal rate closer to 3% than 4%. What may matter more is the dollar amount we can pull out, not the percentage. Thanks to elevated portfolio balances, a 3% withdrawal of a larger portfolio may translate into a withdrawal that is every bit as large as 4% on that same portfolio ten years ago. In addition to balances being larger, retirees can enlarge their lifetime portfolio withdrawals by employing a flexible withdrawal approach rather than taking fixed amount withdrawals; helping to reduce portfolio demands and a requirement for bonds with minuscule yields.

It is good to remember to continue to use and learn from the Financial Tools, which have always been available to us: Personal Spending Plan, Personal Net Worth Statement, Potential Cash Flow Analysis from All Cash Flow Streams (Dental Practice, Tax-Deferred Portfolio, Personal After-Tax Portfolio, Investment Real Estate, and other holdings. It is a good thing most of us have been given enough years to layer our financial learning, with intention!

Keep a Moving Target Orientation!

Invest in Yourself
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Two Courses to Consider:
Creating More Financial Freedom / Mastering Business Essentials

Father of Index Funds

John Bogle has many books to his credit. We all may benefit from reading one or more of them as a part of a New Years Resolution focused on Raising Our Financial Literacy! A perfect Stocking Stuffer, with a future focus in mind! John C. Bogle, the founder of Vanguard, changed investing forever for ordinary Americans, and wrote a dozen books over his lifetime, selling over 1.1 million copies worldwide.

An editor that worked with Bogle said, “I don’t think there’s an author who spent greater care on the words he chose,” and, “when he did a book, he was so meticulous; he’d rewrite and rewrite. He always went the extra mile to make sure there wasn’t a single person who could not understand what he was saying.”

“Jack,” as he was referred to by many, made it his mission to educate people about the benefits of index funds and not paying high fees to mutual fund managers. Below are some of the best books he authored:

1. Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor

The first edition of this classic was published in 1999, and Bogle wrote a completely updated second edition a decade later to help investors understand mutual funds and how his simple and low cost investing strategy can be used to outperform stock pickers.

2. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

This 304-page hardcover book is one of Wiley Publishing’s Little Book investing series and has proven to be an incredibly popular tool for investors. In this investing bible, Bogle presents his ideas succinctly for the layman.

• Warren Buffett advised in his 2014 letter to shareholders that rather than listen to the “siren songs” of advisors, “investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.”
• Bogle said even he needed to be reminded of his own advice in trying times. “How do I feel when the market goes down 50%?” he continued. “Honestly, I feel miserable. I get knots in my stomach. So what do I do? I get out a couple of my books on ‘staying the course’ and reread them!”

3. The Battle for the Soul of Capitalism

John Bogle was a vocal critic of Wall Street and the American financial system, and in this book the insider revealed what he knew about the unethical practices of money managers and corporate executives, which add costs to millions of small investors.

• The New York Times called it “yet another important contribution in an illustrious career,” and it was long listed for the Financial Times and McKinsey’s Business Book of the Year Award in 2005.

4. John Bogle on Investing: The First 50 Years

Bogle’s senior thesis at Princeton University was titled “The Economic Role of the Investment Company,” and it contained the very ideas that Vanguard would be built on. It is included in this compilation of his best speeches.

5. Stay the Course: The Story of Vanguard and the Index Revolution

At the time of publication, Vanguard had more $5 trillion in assets under management, and the road to that number wasn’t easy. Early on it was dubbed “un-American” and mocked by Wall Street professionals.

• Named after his most iconic piece of advice, Bogle’s last book is a memoir that traces the history of the Vanguard Group and provides new details. He addresses his critics, his regrets and even his Vanguard successors.

Sign-up for Courses to Continue Advancing Your Financial Literacy
Courses to Consider: Creating More Financial Freedom / Mastering Business Essentials

Do you feel daunted when thinking about how to achieve financial freedom?

I admit I don’t know exactly what that looks like, but I’ve had some success with easing my financial burdens thanks to a couple of habits I’ve implemented over the years.

Paying Your Mortgage Twice a Month

One habit is paying my mortgage twice a month. If your first thought is, “holy cats I can’t do that,” I understand, but it may not be as difficult as you assume. I’m not suggesting that you pay double, I’m suggesting that you pay ½ a month ahead.

Instead of paying $2,000 on the 15^th, you would pay $1,000 on the 1^st and $1,000 on the 15^th and then repeat the next month. Why is this a good idea? Because mortgages are calculated over a long span of time and a large portion is comprised of interest. By paying twice a month, a larger percentage goes to the principal.

Habit Development to Reach Financial Freedom

So how do you get into this habit?

It’s pretty easy if you are beginning a new loan because you have about a 45-60 day grace period after closing before the first payment is due. You can make your first ½ payment 15 days before the due date.

If you have an existing mortgage and like most of us don’t have the money on hand to make an additional ½ payment, then you can start by saving toward the ½ payment until you have enough to make it for the first time, which then reduces your next monthly payment. That may take you a few months.

This same idea can be applied to your car payment. For both your mortgage and your car, make sure your loans don’t carry a penalty for early payoff.

Financial freedom is one step closer.

What steps do you take to better manage your finances? We’d love to hear from you in the comments!