How to Measure Backward for Inflation

Inflation is the hot topic of the last few months. Goods seem to be increasing in price and money isn’t stretching quite as far. Naturally, most people are seeking ways to inflation-proof their money. The question is, can that really be done? And if so, how can clients use this to better their lives now and in the future?

Inflation is often called the silent tax, and the tricky thing is that it doesn’t discriminate. Everyone feels the impact of inflation, no matter how much or how little money they have. The only true answer, though, to outpacing inflation is to make more money. That’s one of the best things you can do as costs rise, and one of the only tangible solutions. (Although your clients’ future selves will certainly thank you for encouraging them to get the two assets that actually improve with inflation: a mortgage and a whole life insurance premium.)

The problem is, many people see inflation as a short-term issue. Things seem tough now, yet the hope is that they’ll return to a sense of normalcy eventually. The thing about inflation is that it creeps—at some point, where we’re at now will feel like normal. People have a hard time conceiving that inflation is going to have major implications for how much money they’ll want for retirement (if they retire), in addition to other cost considerations. That’s why it’s helpful to help clients measure backward. That way, they can get a realistic picture of inflation, so they can better prepare for it all along the way.

How to Measure Backward

Measuring backward refers to Dan Sullivan’s idea in his book The Gap and the Gain. The idea is that instead of assessing where you are now and comparing it to where you want to be, you should compare it to where you started. The former can lead to being in the “gap,” which is when you measure your success by external metrics. This can lead to some negative feelings, which is antithetical to Prosperity. Instead, measuring backwards allows you to be in the “gain,” where YOU determine your success based on internal metrics.

For example, if you look back at where you started your career, and measure to where you are now, you’ve probably made a lot of progress. It’s likely that you’ve made more money, you’ve gotten some promotions, and learned important lessons along the way. Measuring the progress you’ve personally made is key to continuing that progress. Focusing on your journey and the progress you’ve made is Prosperity Thinking, and helps you to move forward with purpose.

So how does this relate to inflation? When you measure forwards, you’re calculating a projection that may or may not come to pass, which makes it easier to write off inflation. Well, when you look back at income data and compare that to income today, you can see the effects of inflation plainly. It becomes a lot easier to grasp the reality of the situation because it’s real data. This can help your clients conceptualize the issue, and encourage them to seek solutions now. And if they can measure their own income journey backward, they can gain some clarity and inspiration to move their needle forward.

So What Are the Numbers?

The University of Missouri’s library contains a pretty impressive income database that is perfect for measuring backward. While there’s decades of data to sort through, for hundreds of jobs, let’s take a look at military wages 250 years ago.

In 1870, a warrant officer in the Navy with 12 years of service under his belt earned $150 a month when at sea. He’d earn $133.33 a month when on shore duty. Today, a warrant officer with over 14 years of service earns between $5,317 and $6,907 a month. If you plug that into a Truth Concepts rate calculator, you’ll see that over 252 years (or 3,024 months) the average annual inflation rate is just 1.42%. That’s not that high a rate, and yet there’s a significant difference in the income.

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Interpreting the Inflation Data

So how do we accurately apply this data to your client’s current lives? After all, they hardly lived 250 years ago. They’re not likely to see a change that drastic. Yet what we do know is that over that time, the actual inflation rate wasn’t that significant at under 2%. So let’s apply it to a modern scenario.

Most clients spend about 50 years of their lives working, give or take. If you have a client making $100,000 right now, and they’re diligently saving for retirement, chances are they’re saving with that income of $100,000 in mind. They might even think they can take a little less. They haven’t factored in inflation, because they’re not thinking about how it’s going to affect the world 50 years from now.

Yet, as we know, inflation is going to do it’s thing one way or another. So let’s use this same 1.42% inflation rate, and apply it to the $100k income, and see what it would look like in 50 years. As you can see in the Future Value calculator below, the client would want an income of $202,386 to have the same impact as their current income.

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Inflation Proof Assets

Ultimately, what this means is that clients should be saving much more than they think they need to. This is why we recommend clients get in the habit of savings money, and increase that habit any time they get a raise or a bonus. That way, the money gets tucked away before you can miss it. Whole life insurance is an incredibly efficient asset to save into, because the level premiums are “inflation-proof.” In fact, they get better with inflation (as do mortgages). That’s because you’re paying the same amount of money over an extremely long time frame, which means over time that money is losing value. Yet thanks to your contracts, you’re locked in, and the banks or insurance companies can’t increase your payments.

Because whole life insurance has a savings component that allows clients to earn interest and dividends, being able to maintain that account for what essentially “feels” like less is invaluable.

Want to Help Clients Save?

With the Currence app, you can help your clients be better savers, and in turn use their reservoir of savings to create more income streams and be even more efficient. The app is designed to encourage clients to save first, and allows you to work in tandem with your clients. For more information on Currence, be sure to join our Linguistics membership (or higher) to learn more and be among the first advisors to join.

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