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Looking Ahead: The Role of Market and Inflation Projections in Your Financial Plan

Key Points
  • At Schwab, we believe all investors should have access to a financial plan.

  • Projections are critical to your financial plan.

  • Each year Charles Schwab Investment Advisory updates its market and inflation projections for Schwab clients.

  • Consider using such updates as an opportunity to review your plan.

How important is it for you to have a financial plan? Critical. At Schwab, we put it at the top of our list of 7 Investment Principles.

Just as important is that investors treat their plans as living documents. You should update your plan when your life changes, say, because of a birth, marriage or new goal. But also make sure you account for changes in the economic outlook. In particular, changing inflation and market forecasts can affect the assumptions underlying your plan.

Here, we'll take a closer look at how inflation and market forecasts matter to a financial plan. The projections included in financial plans at Schwab are based on economic and market forecasts from Schwab analysts and are updated annually. Investors should consider using such changes an opportunity to review their plans and talk with their advisors about whether their portfolios are on course. Here we’ll take a look at our latest revisions.  


How much are you going to spend in the future?

That's the basic question that a financial plan seeks to project and plan for. Drawing up a financial plan generally means identifying an amount, most often starting with how much you'd like to save for retirement, and then building an appropriate saving and investment plan to get there. But this doesn't happen in a vacuum. You may create a plan on a drawing board, but your portfolio is designed to be out in the world, exposed to economic and market forces that you can't control.

Inflation is one of those forces. It's important to think about inflation because it drives up future costs—thereby eating away at the future value of every dollar you save today. Not all costs are rising at the same speed. Certain expenses, like health care and college education, may be rising faster than other costs. Other costs may be falling.

As you might expect, a financial plan must take account of how fast prices are rising if it’s to be of any use as a savings tool. To do that, your plan will make baseline assumptions about how much future expenses will rise. When it looks like inflation may be faster than previously assumed, that could be a reason to consider modifying a plan.

As it happens, the experts at Charles Schwab Investment Advisory (CSIA) now expect prices to rise faster over the next decade than they did when they issued projections last year, based on market conditions and other factors. Our analysts raised their projection for average annual inflation over the next 10 years from 1.51% to 1.93%, for baseline expenses like basic consumer spending.  This adjustment reflects the fact that inflation expectations have increased over the last year.

As noted above health care costs could rise faster. Schwab financial plans, created with a Financial Planner or Financial Consultant, can be designed to anticipate those costs. returns

How will your portfolio perform in the future?  The future is uncertain, of course, but your plan should still reflect the best available projections.

Low future returns have been a concern dating back to the 2008 financial crisis. Since then, CSIA and Schwab generally have projected that future returns from stocks, bonds and other investments will be below their historical averages because of low interest rates, current valuations and other factors.

The good news is that the market has been beating the projections recently for many asset classes.  Positive streaks like this can help a plan stay ahead of the game when it comes to funding goals. But your financial plan should reflect current economic conditions, as well as unknowns.

So, despite the recent run in the market, CSIA has actually lowered its projection for the performance of U.S. Large Cap Stocks over the next decade. The expectation is that they will rise 6.73% per year, a small change from the 6.87% projected in 2016. Projected returns for other asset classes have had similar adjustments. The table below provides more details.

Schwab 10-Year Return Projections – 2016 changes to 2017

Source: CSIA . Selected asset classes. Projections show geometric return projections, forecast for 10-years and are updated and revised annually.

For additional insight on how these projections are made, read Why Market Returns May Be Lower in the Future. The article explains changes in projections earlier in 2017, though updates are being released for use in Schwab financial plans in August.

What to do now

  • If you don’t have a financial plan, get one. Schwab Financial Consultants can work with you to create a financial plan, for retirement, college savings or other financial goals.
  • Update your plan regularly. Your life changes and so do the markets. Your financial plan should be based on real life, and factor in current market conditions, interest rates, valuations, inflation, and other factors. It should look forward, not backward.
  • Stress-test your plan. Your Financial Consultant, Planning Consultant, or other planner can help test your plan against varying conditions, including higher inflation rates, lower return expectations or other variables. Where is your plan most sensitive? What can you do to anticipate in advance changes? Talk to your advisor.
  • Don’t panic or make drastic changes to your plan. A financial plan is a long-term projection, a roadmap and path to help you reach your goals, based on the best information you have about your goals—and about the markets. Often, small changes in savings rate, spending amounts or investment strategy can often work together to get you back on track. 

In financial planning and investing there’s one certainty: No one can know the future. But we can plan, project and make updates—and your plan should adapt as well.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third-parties and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held.

Small cap companies are subject to greater volatility than those in other asset categories.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.  Investing in emerging markets may accentuate these risks.

Charles Schwab Investment Advisory, Inc. (“CSIA”) is an affiliate of Charles Schwab & Co., Inc. (“Schwab”).


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